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Short Sale Constraints and Stock Returns

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  • Charles M. Jones
  • Owen A. Lamont

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8494.

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Date of creation: Oct 2001
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Publication status: published as Jones, Charles M. and Owen A. Lamont. "Short-Sale Constraints and Stock Returns." Journal of Financial Economics 66, 2-3 (November-December 2002): 207-39.
Handle: RePEc:nbr:nberwo:8494

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  1. Owen A. Lamont & Richard H. Thaler, 2003. "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(2), pages 227-268, April.
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  7. Michael J. Aitken & Alex Frino & Michael S. McCorry & Peter L. Swan, 1998. "Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange," Journal of Finance, American Finance Association, American Finance Association, vol. 53(6), pages 2205-2223, December.
  8. Dechow, Patricia M. & Hutton, Amy P. & Meulbroek, Lisa & Sloan, Richard G., 2001. "Short-sellers, fundamental analysis, and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 61(1), pages 77-106, July.
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