Short-Selling Constraints: The Asymmetric Role of Institutional Ownership, Relative Short Interest, Options and Dividends

Abstract

We assess the effect of four short-sale constraints on stock returns in isolation and in combination, in generally falling versus generally rising markets, and considering relative effects for large/mid-cap versus small/micro-cap firms. There is substantial evidence that our more fully specified model provides considerable additional explanatory power with less factor omission bias than prior studies. We also find that the constraint behavior is asymmetric when testing during generally falling versus generally rising markets, and that small- and micro-cap firms provide important effects when viewed separately. Our results provide substantive pricing differences between least versus most short-sale constrained stocks.