Mispricing and Anomalies: An Exogenous Shock to Short Selling from JGTRRA

We investigate the causal impact of short-sale constraints on market anomalies by analyzing a comprehensive set of 182 anomalies. Our approach leverages a persistent, robust, and plausibly exogenous shock to short-selling supply caused by the dividend tax law change in the Job and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. Our findings reveal that anomalies decline after JGTRRA. However, this tax law change impedes arbitrageurs’ ability to correct mispricing, resulting in anomalies decaying less following dividend record months compared to other months post-JGTRRA. Furthermore, this effect is concentrated on overpriced stocks as opposed to underpriced stocks. Interestingly, while this shock significantly affects most types of anomalies, valuation anomalies remain unaffected.

Keywords: Exogenous short-selling shock, JGTRRA, mispricing, anomalies, difference-in-differences

JEL Classification: G4, G12, G14, G18

Suggested Citation: Suggested Citation

Han, Yufeng and Lu, Yueliang and Xu, Weike and Zhou, Guofu, Mispricing and Anomalies: An Exogenous Shock to Short Selling from JGTRRA (December 4, 2020). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3730653 or http://dx.doi.org/10.2139/ssrn.3730653