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

Yufeng Han, Lu, Yueliang (Jacques), Weike Xu and Guofu Zhou

Journal of Empirical Finance, 2024, vol. 78, issue C

Abstract: We investigate the causal impact of short-sale constraints on market anomalies by analyzing a comprehensive set of 182 anomalies. Our approach leverages a persistent, robust, and plausibly exogenous shock to short-selling supply caused by the dividend tax law change in the Job and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. Our findings reveal that anomalies decline after JGTRRA. However, this tax law change impedes arbitrageurs’ ability to correct mispricing, resulting in anomalies decaying less following dividend record months compared to other months post-JGTRRA. Furthermore, this effect is concentrated on overpriced stocks as opposed to underpriced stocks. Interestingly, while this shock significantly affects most types of anomalies, valuation anomalies remain unaffected.

Keywords: Exogenous short-selling shock; JGTRRA; Mispricing; Anomalies; Difference-in-differences (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 G4 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:78:y:2024:i:c:s0927539824000720

DOI: 10.1016/j.jempfin.2024.101537

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