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This article investigates the impact of short sale constraints on stock returns in a powerful setting in which the uptick rule on the New York Stock Exchange (NYSE) was suspended for a given set of stocks (pilot stocks) by the Securities and Exchange Commission (SEC) in 2005. Comparing future stock returns for pilot stocks and control stocks, I show that the suspension of the uptick rule on average mitigates stock overvaluation by 3.5% of the stock value during a 1-year time period. This effect is profound in stocks with no options, small stocks, and value stocks. Findings in this article are consistent with Miller's (1977) overpricing hypothesis and suggest that removing the uptick rule help improve market efficiency by bringing stock prices closer to their fundamental values.
