Short Sale Constraints and Dispersion of Opinion: Evidence from the Indian Equity Market


  • We are grateful to CUNY's High Performance Computing Facility at the College of Staten Island for technical support. Gousgounis acknowledges the Graduate Center for research support. We also thank the anonymous referees and the seminar audiences of Baruch College, the Eastern Finance Association Conference, the Midwest Finance Association Conference and the Conference on Research on Economic Theory and Econometrics for helpful suggestions.

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Short sale constraints can inflate market prices, as bearish investors cannot act on their market views. The paper uses data from the Indian equity market to test whether opinion dispersion leads to higher overpricing when short sales are prohibited. The Indian equity market provides a natural testing environment, as short sales were banned between 2001 and 2008. The empirical results offer supportive evidence of the relation between opinion dispersion and overpricing in a market with short sale constraints.