Short Sale Constraints and Stock Returns

55 Pages Posted: 29 Sep 2001 Last revised: 18 Sep 2022

See all articles by Charles M. Jones

Charles M. Jones

Columbia University

Owen A. Lamont

Harvard University - Department of Economics

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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 University ( email )

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Owen A. Lamont

Harvard University - Department of Economics ( email )

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United States