Short Sale Constraints, Dispersion of Opinions, and Overnight Returns

86 Pages Posted: 22 Jun 2007

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Paul D. Koch

Iowa State University - Finance Department; Iowa State University - Finance Department

Laura A. Tuttle

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

Jenny Zhang

affiliation not provided to SSRN

Date Written: February 2008

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

Suggested Citation

Berkman, Henk and Koch, Paul D. and Tuttle, Laura A. and Zhang, Jenny, Short Sale Constraints, Dispersion of Opinions, and Overnight Returns (February 2008). Available at SSRN: https://ssrn.com/abstract=993304 or http://dx.doi.org/10.2139/ssrn.993304

Henk Berkman

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Paul D. Koch (Contact Author)

Iowa State University - Finance Department

Ivy College of Business
Ames, IA 50011
United States
5152942491 (Phone)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

Iowa State University - Finance Department

Ames, IA 50011-2063
United States
5152942491 (Phone)

Laura A. Tuttle

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )

United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
United States
202-551-6544 (Phone)

Jenny Zhang

affiliation not provided to SSRN

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