Short Sale Constraints and Stock Returns

55 Pages Posted: 29 Sep 2001 Last revised: 24 Oct 2010

See all articles by Charles M. Jones

Charles M. Jones

Columbia Business School

Owen A. Lamont

Harvard University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 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.

Suggested Citation

Jones, Charles M. and Lamont, Owen A., Short Sale Constraints and Stock Returns (October 2001). NBER Working Paper No. w8494. Available at SSRN: https://ssrn.com/abstract=285614

Charles M. Jones (Contact Author)

Columbia Business School ( email )

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Owen A. Lamont

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

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