In Short Supply: Short-Sellers and Stock Returns

We use detailed security lending data to examine the relation between short sale constraints and equity prices. Our results show that the supply of lendable shares is frequently binding, and the constraint is related to firms' accounting characteristics. Specifically, we find: (1) when the lendable supply is binding (non-binding), short-sale supply (demand) is the main predictor of future stock returns, (2) abnormal returns to the short-side of nine well-known market anomalies are attributable solely to "special" stocks, (3) controlling for expected borrowing costs, a stock's supply of lendable shares varies over time as a function of accounting variables associated with the pricing anomalies, so shares are least available when they are most attractive to short sellers. Overall, our results highlight the central role played by the supply of lendable shares in both equity price formation and returns prediction.