Heterogeneous Beliefs, a Short-Sale Restriction, and the Cross Section of Stock Returns: An Evidence from China

We find a negative cross-sectional relation between heterogeneous beliefs and future stock returns in China, where short sale is prohibited in our sample period. Compared to other empirical works, which often be done in a market without short sale prohibition, we obtain this strong negative results after controlling several characteristics of stocks, such as size, leverage, book to market ratio and momentum. This negative relationship supports theoretical conjecture on heterogeneous beliefs (Miller(1977)). Our heterogeneous beliefs proxy is unexplained turnover, which is turnover of individual stocks adjusted by market turnover and its momentum. We also control the liquidity and idiosyncratic uncertainty in the robust test. These two factors are often attributed to the reason of the negative relation between turnover and future returns.