A Synthesized Model of Short Selling Constraints and Their Impact on Stock Returns

Abstract

This paper presents a synthesized model explaining the returns of short-sale constrained stocks. We combine short-sale constraints that were previously treated individually or in pairs into a more fully specified model. The model is also specified in generally falling versus generally rising markets, and in consideration of relative effects for large/mid-cap versus small/micro-cap firms. There is evidence that a more fully specified model provides additional insight with less factor omission bias than prior models. Additionally, our results also indicate pricing differences between least versus most short-sale constrained stocks.

Keywords: Short-sell constraints, Asymmetry, Relative short interest, Institutional ownership, Options, Dividends

JEL Classification: G11, G12, G14, G17