Stock Mispricing, Differences of Opinion, and Short-Sale Constraints

Emerging stock markets are dominated with overconfident individual investors and in those markets short-sale constraints are frequently used to promote market stability. The unique market participants and regulations may influence the formation of stock prices and potentially lead to stock mispricing. This study finds that stocks in Taiwan markets on average are overpriced and this mispricing is related to differences of opinion and short-sale constraints, supporting the resale option theory. This relation is valid for the subsample and its dynamic relation and is robust to controls for firm attributes. This study confirms that the demand of resale option from overconfident investors cause stock mispricing in the market with short-sale constraints, and this mispricing is connected with stock volume and stock volatility