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Short Sale Constraints, Divergence of Opinion and Asset Values: Evidence from the Laboratory

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  • Gerlinde Fellner

    ()

  • Erik Theissen

    ()

Abstract

The overvaluation hypothesis (Miller 1977) predicts that a) stocks are overvalued when there are short selling restrictions and that b) the overvaluation is increasing in the degree of divergence of opinion. We design an experiment that allows us to test these predictions in the laboratory. Our results support the hypothesis that prices are higher in the presence of short selling constraints. The overvaluation does not depend on the degree of divergence of opinion.

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File URL: http://www.econ-pol.unisi.it/labsi/labsi_paper/labsi9.pdf
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Bibliographic Info

Paper provided by University of Siena in its series Labsi Experimental Economics Laboratory University of Siena with number 009.

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Date of creation: Sep 2006
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Handle: RePEc:usi:labsit:009

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Keywords: overvaluation hypothesis; short selling constraints; divergence of opinion;

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  1. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
  2. Eric C. Chang & Joseph W. Cheng & Yinghui Yu, 2007. "Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market," Journal of Finance, American Finance Association, vol. 62(5), pages 2097-2121, October.
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  6. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
  7. Lauren Cohen & Karl B. Diether & Christopher J. Malloy, 2007. "Supply and Demand Shifts in the Shorting Market," Journal of Finance, American Finance Association, vol. 62(5), pages 2061-2096, October.
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  9. Karl B. Diether & Kuan-Hui Lee & Ingrid M. Werner, 2009. "Short-Sale Strategies and Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 575-607, February.
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  12. Danielsen, Bartley R. & Sorescu, Sorin M., 2001. "Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 451-484, December.
  13. Michael J. Aitken & Alex Frino & Michael S. McCorry & Peter L. Swan, 1998. "Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange," Journal of Finance, American Finance Association, vol. 53(6), pages 2205-2223, December.
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  15. Boehmer, Ekkehart & Huszar, Zsuzsa R. & Jordan, Bradford D., 2010. "The good news in short interest," Journal of Financial Economics, Elsevier, vol. 96(1), pages 80-97, April.
  16. Berkman, Henk & Dimitrov, Valentin & Jain, Prem C. & Koch, Paul D. & Tice, Sheri, 2009. "Sell on the news: Differences of opinion, short-sales constraints, and returns around earnings announcements," Journal of Financial Economics, Elsevier, vol. 92(3), pages 376-399, June.
  17. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
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  20. Robert Battalio & Paul Schultz, 2006. "Options and the Bubble," Journal of Finance, American Finance Association, vol. 61(5), pages 2071-2102, October.
  21. Hemang Desai & K. Ramesh & S. Ramu Thiagarajan & Bala V. Balachandran, 2002. "An Investigation of the Informational Role of Short Interest in the Nasdaq Market," Journal of Finance, American Finance Association, vol. 57(5), pages 2263-2287, October.
  22. Dechow, Patricia M. & Hutton, Amy P. & Meulbroek, Lisa & Sloan, Richard G., 2001. "Short-sellers, fundamental analysis, and stock returns," Journal of Financial Economics, Elsevier, vol. 61(1), pages 77-106, July.
  23. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
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Cited by:
  1. Uri Ben-Zion & Shosh Shahrabani & TAL SHAVIT, 2007. "Short-selling and the WTA-WTP gap," Working Papers 0706, Ben-Gurion University of the Negev, Department of Economics.
  2. Sascha F├╝llbrunn & Tibor Neugebauer, 2012. "Margin Trading Bans in Experimental Asset Markets," Jena Economic Research Papers 2012-058, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  3. Uri Ben-Zion & Ido Erev & Ernan Haruvy & TAL SHAVIT, 2007. "Under-Diversification And The Role Of Best Reply To Pattern," Working Papers 0707, Ben-Gurion University of the Negev, Department of Economics.

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