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Short sale constraints, divergence of opinion and asset prices: Evidence from the laboratory

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  • Fellner, Gerlinde
  • Theissen, Erik

Abstract

The overvaluation hypothesis (Miller, 1977) predicts that (a) stocks are overvalued in the presence of short selling restrictions and that (b) the overvaluation increases in the degree of divergence of opinion. We design an experiment that allows us to test these predictions in the laboratory. The results indicate that prices are higher with short selling constraints, but the overvaluation does not increase in the degree of divergence of opinion. We further find that trading volume is lower and quoted bid-ask spreads tend to be higher when short sale restrictions are imposed.

Suggested Citation

  • Fellner, Gerlinde & Theissen, Erik, 2014. "Short sale constraints, divergence of opinion and asset prices: Evidence from the laboratory," Journal of Economic Behavior & Organization, Elsevier, vol. 101(C), pages 113-127.
  • Handle: RePEc:eee:jeborg:v:101:y:2014:i:c:p:113-127
    DOI: 10.1016/j.jebo.2014.02.010
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    References listed on IDEAS

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    Cited by:

    1. Lionel Page & Christoph Siemroth, 2018. "How much information is incorporated in financial asset prices? Experimental Evidence," QuBE Working Papers 054, QUT Business School.

    More about this item

    Keywords

    Overvaluation hypothesis; Short selling constraints; Divergence of opinion;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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