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

Abstract

We study the causal effect of short-sale constraints on anomalies by examining an extensive set of 182 anomalies. Our identification strategy relies on a persistent, robust and plausibly exogenous shock to short-selling supply induced by the dividend tax law change in the Job and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. We find that anomalies become stronger following the dividend record months, driven by stronger overpricing as opposed to underpricing in the post-JGTRRA periods. Interestingly, while the shock magnifies returns to most anomaly types, we find that valuation anomalies seem unlikely to be driven by mispricing.

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

JEL Classification: G4, G12, G14, G18