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 and persistent to today, 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 and the mispricing is mainly from the overpriced stocks. We also find that
while most anomalies are likely due to mispricing, valuation anomalies are unlikely, as they are
not affected by the dividend taxation effect.

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

JEL Classification: G4, G12, G14, G18