Potential pilot problems: Treatment spillovers in financial regulatory experiments

The total effects of a regulatory change consist of direct effects and indirect effects (spillovers), but the standard difference-in-difference approach mostly ignores potential indirect effects. During the 2007 full repeal of the uptick rule, short-sellers become much more aggressive across the board, even in control stocks where the uptick rule is already suspended. This finding is consistent with positive and significant indirect effects on control stocks, likely driven by aggressive broad list-based shorting. In contract, the indirect effect coefficients on shorting aggressiveness are negative for the 2005 partial uptick repeal, possibly due to substitutions between control and treatment stocks.