Publication Type
Journal Article
Version
publishedVersion
Publication Date
1-2020
Abstract
In analyzing regulatory experiments, a fundamental assumption is that the control group is unaffected. However, in many settings, this assumption may not hold. Generally, the total effect of a regulatory change consists of direct and indirect effects, but the standard difference-in-difference approach measures only direct effects. We apply our methods to the 2007 repeal of the uptick rule by the SEC. The indirect effects are substantial, because unlike the 2005 partial repeal, total repeal enables aggressive portfolio shorting. In particular, we find that short sellers become much more aggressive across the board, and shorting activity increases, even in control stocks where the uptick rule was already suspended. The 2007 repeal also causes increased price efficiency and slightly worse liquidity. We conclude that regulatory pilot designers should carefully consider potential spillovers.
Keywords
Inference, Short sales, Short interest, Tick test, Regulation SHO
Discipline
Finance and Financial Management
Research Areas
Finance
Publication
Journal of Financial Economics
Volume
135
Issue
1
First Page
68
Last Page
87
ISSN
0304-405X
Identifier
10.1016/j.jfineco.2019.05.016
Publisher
Elsevier
Citation
BOEHMER, Ekkehart; JONES, Charles; and ZHANG, Xiaoyan.
Potential pilot problems: Treatment spillovers in financial regulatory experiments. (2020). Journal of Financial Economics. 135, (1), 68-87.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6229
Copyright Owner and License
Publisher
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.jfineco.2019.05.016