We examine the causal effect of limits to arbitrage on 11 well-known asset pricing anomalies using Regulation SHO, which relaxed short-sale constraints for a random set of pilot stocks, as a natural experiment. We find that the anomalies became weaker on portfolios constructed with pilot stocks during the pilot period. Regulation SHO reduced the combined anomaly long-short portfolio returns by 72 basis points per month, a difference that survives risk adjustment with standard factor models. The effect comes only from the short legs of the anomaly portfolios.
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