Short Sale Constraints and Stock Returns
56 Pages Posted: 20 Sep 2001
Date Written: August 2001
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: Suggested Citation