Short Sale Constraints And Stock Returns
Charles M. Jones
Columbia Business School - Finance and Economics
Owen A. Lamont
Harvard University - Department of Economics
CRSP Working Paper No. 533
Stocks can be overpriced when short sale constraints bind. We study the costs of short selling equities, 1926 - 1933, using the publicly observable market for borrowing stock. Some stocks are sometimes expensive to short, and it appears that stocks enter the borrowing market when shorting demand is high. We find that stocks that are expensive to short or which enter the borrowing market have high valuations and low subsequent returns, consistent with the overpricing hypothesis. Size-adjusted returns are one to two percent lower per month for new entrants, and despite high costs it is profitable to short them.
Number of Pages in PDF File: 56
Keywords: mispricing, short selling, short-sale constraints, securities lending.
JEL Classification: G14
Date posted: September 20, 2001