Short Sale Constraints, Divergence of Opinion and Asset Value:Evidence from the Laboratory

The overvaluation hypothesis (Miller 1977) predicts that a) stocks are overvalued inthe presence of short selling restrictions and that b) the overvaluation increases in the degree ofdivergence of opinion. We design an experiment that allows us to test these predictions in thelaboratory. The results indicate that prices are higher with short selling constraints, but theovervaluation does not increase in the degree of divergence of opinion. We further find thattrading volume is lower and bid-ask spreads are higher when short sale restrictions are imposed.