Short Sale Constraints, Differences of Opinion, and Overvaluation

Boehme, Rodney D; Danielsen, Bartley R.; Sorescu, Sorin M.

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Short Sale Constraints, Differences of Opinion, and Overvaluation

51 Pages Posted: 10 Apr 2005

See all articles by Rodney D Boehme

Rodney D Boehme

Wichita State University - Department of Finance, Real Estate & Decision Sciences (FREDS)

Bartley R. Danielsen

North Carolina State University - Poole College of Management

Sorin M. Sorescu

Texas A&M University; Adam C. Sinn `00 Department of Finance

Abstract

Miller (1977) hypothesizes that dispersion of investor opinion in the presence of short-sale constraints leads to stock price overvaluation. However, previous empirical tests of Miller's hypothesis have examined the valuation effects of only one of these two necessary conditions. We examine the valuation effects of the interaction between differences of opinion and short sale constraints. We find robust evidence of significant overvaluation for stocks that are subject to both conditions simultaneously. Stocks are not systematically overvalued when either one of these two conditions is not met.

Keywords: Short Sale Constraints, Asset Pricing

JEL Classification: G12

Suggested Citation: Suggested Citation

Boehme, Rodney D and Danielsen, Bartley R. and Sorescu, Sorin M., Short Sale Constraints, Differences of Opinion, and Overvaluation. Available at SSRN: https://ssrn.com/abstract=686818