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From the latter point it should be obvious that extra taxation of companies that pay out a high portion of their profits in dividends is economically irrational.

Another stock market phenomenon that is frequently under attack is short selling. Many countries, including the U.S., the U.K., Portugal, France and Ireland26 have recently instituted various restrictions on short sales.

Banning short-selling delays price adjustment to the correct value. The efficient market hypothesis is based on the assumption (as well as many other assumptions) that short-selling is possible. While there are reasons to remain skeptical to the efficient market hypothesis in other regards,28, it is correct in noting that the ability to sell short helps move markets closer to that ideal.

If a certain stock (or other asset) is overvalued, yet the people who realize this have already gotten out of the stock, then the way for them to correct this overvaluation is to sell the stock short. That way, these informed investors can bring the price closer to its fair value. But if short-selling is banned, this kind of adjustment can't take place.

Another aspect of this is that people who for some reason believe a certain stock is too cheap can use their money or even borrowed money to buy stocks they think are too cheap. Yet people who come to the conclusion that a certain stock is overvalued can't do anything about it unless they already owned the stock in the absence of short-selling. And even those that already owned the stock are limited to their stocks, while people bullish about the stock could possibly borrow to buy more of it. This creates an asymmetric situation where people bullish about a stock will have much greater influence than those that are bearish about it, which increases the risk that some stocks will be over-valued.

This would be similar to say an American election where both Republicans and Democrats had the possibility of voting for the Republican candidate, but only those who had previously voted




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