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

The overvaluation hypothesis (Miller 1977) predicts that a) stocks are overvalued when there are short selling restrictions and that b) the overvaluation is increasing in the degree of divergence of opinion. We design an experiment that allows us to test these predictions in the laboratory. Our results support the hypothesis that prices are higher in the presence of short selling constraints. The overvaluation does not depend on the degree of divergence of opinion.