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

Abstract

Whether 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 significant anomalies. We find that anomalies
become stronger after the dividend record months in the post-JGTRRA periods, which is driven
by stronger mispricing in the dividend record months and is mainly from the overpriced stocks.
We also find that while most anomalies are likely due to mispricing, valuation anomalies are not
affected by the dividend taxation effect, suggesting that these anomalies are unlikely driven by
mispricing.

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

JEL Classification: G4, G12, G14, G18