Short Sale Constraints and Stock Misvaluation: Daily Evidence on the Nasdaq

Min (Kevin) Zhao (minzhao@mtsu.edu)
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Min (Kevin) Zhao: Department of Economics and Finance Middle Tennessee State University, Postal: Murfreesboro, TN 37132, USA, ,, http://www.mtsu.edu/

Economia Internazionale / International Economics, 2009, vol. 62, issue 4, 505-530

Abstract: In this paper I investigate the impact of short sale constraints on stock returns using Regulation SHO data on the NASDAQ in 2005. Extant theories suggest that removing the bid-price test rule on the NASDAQ for the so called ‘pilot stock’ would mitigate stock overvaluation. The results in this paper, however, show that lifting the bid-price test rule on the NASDAQ goes beyond correcting such overvaluation. Prices of stocks with the high degree of investor disagreement tend to be depressed relative to prices of stocks with low degree of investor disagreement during the sample period. This surprising result raises the concern that SEC’s recent decision of removing the bid-price test rule for NASDAQ listed securities may not be considered as an optimal policy, if such undervaluation is driven by ‘predatory’ short sellers’ price manipulation.

Keywords: Bid-Price Test Rule; Pilot Program; Regulation SHO; Short Sales; Short Sale Constraints; Stock Misvaluation (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2009
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