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The Long and Short on Long-Short 327
prices up beyond reasonable valuations [see, for example, Came
(1989)l. Company practices may also encourage overpricing. Many
companies, for example, are eager to publicize good news in a
timely manner, but may delay releasing bad or news attempt to disguise
it via window dressing (or, more rarely, commit actual fraud)
Stock prices may thus reflect good news more quickly and unambiguously
than bad news.
Overpricing may also exist because brokers and analysts favor
buy over sell recommendations, and focus research efforts on purchase
father than sale candidates. Such bias may reflect an economi
rationale: Buy recommendations may elicit more commissions, all as
customers are potential purchasers, while commissions from sales
wil come primarily from customers who already own the stock Bias
may reflect political issues: Publishing negative opinions about a
pany may jeopardize investment banking relationships and even
threaten analyst job security [Regan (1993)l. And it may reflect underlying
analyses: Evidence suggests, for example, that brokers may p
duce overly optimistic earnings estimates, especially firms for with the
least stable earnings histories [Huberts and Fuller (1995)l.
Whatever its source, the greater the uncertainty about "true"
value, the more overpricing is likely. This is because increasing uncertainty
leads to increasing divergence of investor opinions. And
those investors with the most optimistic opinions will become the
buyers, setting security prices [see Miller (1990)l. Theoretically, of
course, short-sellers should act to keep shares from becoming ov
priced; if overly optimistic investors bid up share prices beyond
what other investors consider reasonable, those investors should
sell short, reducing upward pressure on prices. But short-selling is
certainly not as unrestricted as buying long.
Share borrowability and uptick rules make short-selling more
difficult than going long. Short-selling is also costlier, because investors
do not receive full interest on the proceeds from short sale
(and retail investors rarely receive of any the interest). Short-selling
may also be legally or contractually restricted for some investors
(such as mutual fids, which can take only limited short positions
Other investors may eschew it because they consider it too specula
tive or morally objectionable.
In fact, short sales have historically accounted for a very sm
percentage of shares outstanding; short interest on the NYSE has