Short Sale Constraints, Dispersion of Opinions, and Overnight Returns

Abstract

Using nine years of data for the largest 3,000 U.S. stocks, we find a tendency for positive returns during the overnight non-trading period followed by reversals during the subsequent trading day session. This pattern is driven by an opening price that is high relative to intraday prices, rather than by a closing price that is low, suggesting that an overnight liquidity premium cannot be the sole cause of this price regularity. Instead, consistent with Miller's (1977) theory applied to the overnight period, we find this behavior is more prevalent among stocks that are more overpriced - with more binding short sale constraints and higher dispersion of opinions. Such overpriced stocks have a higher opening price, and a concomitant tendency for larger overnight returns and trading day reversals.

Keywords: market efficiency, limits to arbitrage, short sale restrictions, institutional ownership, dispersion of opinions, overpricing

JEL Classification: D82, G14, G19