Short Sale Constraints And Stock Returns

56 Pages Posted: 20 Sep 2001  

Charles M. Jones

Columbia Business School - Finance and Economics

Owen A. Lamont

Harvard University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2001

Abstract

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.

Keywords: mispricing, short selling, short-sale constraints, securities lending.

JEL Classification: G14

Suggested Citation

Jones, Charles M. and Lamont, Owen A., Short Sale Constraints And Stock Returns (August 2001). CRSP Working Paper No. 533. Available at SSRN: https://ssrn.com/abstract=281514 or http://dx.doi.org/10.2139/ssrn.281514

Charles M. Jones

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

HOME PAGE: http://www.columbia.edu/~cj88/

Owen A. Lamont (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

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