Potential Pilot Problems: Treatment Spillovers in Financial Regulatory Experiments

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Abstract
The total effect of a regulatory change consists of direct and indirect (spillover) effects, but the standard difference-in-difference approach measures only direct effects and ignores potential indirect effects. We examine the spillover effects on short-sale aggressiveness during the 2007 full repeal of the uptick rule by the SEC. The spillover effects are positive and substantial, in the sense that short sellers become much more aggressive across the board, even in control stocks where the uptick rule is already suspended. The reason for this positive spillover is that full repeal enables aggressive broad list-based shorting, including both control and treatment stocks. In contrast, the 2005 partial uptick repeal induces significant negative spillovers due to a substitution effect. Short sellers become more aggressive in stocks without an uptick rule, and less aggressive in stocks with an uptick rule in place. We conclude that regulatory pilot designers should carefully consider potential spillovers.