Short Sale Constraints and Stock Returns: 1926-2023

Abstract

Stocks that are expensive to borrow to short earn significantly lower returns than cheaply borrowed stocks. This appears to explain a number of anomalies. Borrowing fee are unavailable before 2005. I use variables from CRSP that are correlated with borrowing fees over 2005-2023 to develop proxies for them. Portfolios of stocks the proxy identifies as expensive-to-borrow underperform in every 10-year period from the start of the CRSP data through 2004. I demonstrate the proxy's usefulness in explaining anomalies by showing that the underperformance of lottery stocks with the highest daily maximum returns disappears when expensive to borrow stocks are removed.

Keywords: short selling, anomalies

JEL Classification: G12