Short Sales Constraints and the Diversification Puzzle

51 Pages Posted: 28 Jul 2015 Last revised: 11 Sep 2019

See all articles by Adam V. Reed

Adam V. Reed

University of North Carolina Kenan-Flagler Business School

Pedro Saffi

University of Cambridge - Judge Business School

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance

Date Written: July 23, 2019

Abstract

Disagreement about stock valuation, combined with short-sales constraints, can increase asset prices. We build a model showing that, so long as investor beliefs are not perfectly correlated, investors will disagree less about the value of a conglomerate than about each of its individual divisions. This generates a conglomerate discount, with disagreement and short-sales constraints being complementary in increasing its magnitude. We test these predictions empirically and find substantial support: conglomerates have lower differences of opinion and lower short-sales constraints than pure-play firms. Furthermore, greater differences of opinion and tighter short-sales constraints are significant predictors of valuation differences between conglomerates and pure plays.

Keywords: Diversification discount, short-sales constraints, differences of beliefs, equity lending, conglomerates.

JEL Classification: G10, G11, G14, G18, G28, G32

Suggested Citation

Reed, Adam V. and Saffi, Pedro A. C. and Van Wesep, Edward Dickersin, Short Sales Constraints and the Diversification Puzzle (July 23, 2019). Available at SSRN: https://ssrn.com/abstract=2636770 or http://dx.doi.org/10.2139/ssrn.2636770

Adam V. Reed

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Pedro A. C. Saffi (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://www.pedrosaffi.com

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

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