The SEC’s Short-Sale Experiment: Evidence on Causal Channels and Reassessment of Indirect Effects

Bernard Steven Black, Hemang Desai, Katherine Litvak, Woongsun Yoo*, Jeff Jiewei Yu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

During 2005–2007, the Securities and Exchange Commission conducted a randomized trial in which it removed short-sale restrictions from one third of the Russell 3000 firms. Early studies found modest market microstructure effects of removing the restrictions but no effect on short interest, stock returns, volatility, or price efficiency. More recently, many studies have attributed a wide range of indirect outcomes to this experiment, mostly without assessing the causal channels for those outcomes. We examine the three most often cited causal channels for these indirect effects: short interest, returns, and managerial fear. We find no evidence to support these channels. We then reexamine the principal findings in four recent studies using a sample that closely matches the actual experiment and a common research design and find minimal support for the reported indirect effects. Our findings highlight the importance of confirming a causal channel or an economic mechanism and show that sample selection and specification choices can produce statistical significance even without an underlying economic mechanism.

Original languageEnglish (US)
Pages (from-to)5131-5156
Number of pages26
JournalManagement Science
Volume70
Issue number8
DOIs
StatePublished - Aug 1 2024

Funding

The authors thank David Sraer (department editor), an anonymous associate editor and two anonymous referees for their detailed comments and suggestions. The authors thank Parth Lalkiya and Lauren Fiotakis for research assistance. The authors thank Gauri Bhat, Ian Gow, Doug Hanna, Ankit Jain (discussant), Pab Jotikasthira, Sanjay Kallapur, Umang Khetan (discussant), Srini Krishnamurthy, Charles Lee, Dan Millimet, Shiva Rajgopal, Mehrdad Samadi, Holger Spamann, Shyam Sundar, Jake Thomas, Sorabh Tomar, and Ram Venkataraman as well as workshop participants at American Law and Economics Association (2021), Bar Ilan University, Carnegie Mellon University, Columbia Business School, Conference on Empirical Legal Studies (2022), Corporate Law Academic Webinar Series (2020), Financial Management Association (2021), Florida State University, Haifa University, Hebrew University of Jerusalem, Indian School of Business, Midwest Finance Association, Pace University, Southern Methodist University, Stanford Law School, Tel Aviv University, University of Central Florida, and University of Texas at Arlington as well as participants at American Law and Economics Association, Conference on Empirical Legal Studies, Midwest Finance Association, and Financial Management Association Annual Meetings for comments and discussions on an earlier draft.

Keywords

  • causal channels
  • indirect effects
  • natural experiments
  • Regulation SHO
  • specification choice

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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