Short-sale constraints, differences of opinion, and overvaluation

Miller (1977) hypothesizes that dispersion of investor opinion in the presence of short-sale constraints leads to stock price overvaluation. However, previous empirical tests of Miller's hypothesis examine the valuation effects of only one of these two necessary conditions. We examine the valuation effects of the interaction between differences of opinion and short-sale constraints. We find robust evidence of significant overvaluation for stocks that are subject to both conditions simultaneously. Stocks are not systematically overvalued when either one of these two conditions is not met.