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

Abstract

Whether or not anomalies are due to mispricing or risk is an important question. We examine the causal effect of a novel shock to short selling, the Job and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003, on an extensive set of 182 anomalies. We find that anomalies become stronger after the dividend record months in the post-JGTRRA periods, driven by stronger mispricing in the dividend record months, mainly from the overpriced stocks. Overall, our results support the idea that anomalies are mostly due to mispricing, and the persistence of mispricing is likely caused by arbitrage barriers such as JGTRRA.

Keywords: Exogenous Short-Selling Shock; Mispricing; Anomalies; Market Efficiency; Dividend Taxation; Difference-in-Differences

JEL Classification: G4, G12, G14, G18