Short Constraints are Persistent Constraints

Short selling constraints predict negative stock returns at the monthly frequency, but is it a monthly phenomenon? We show that short selling constraints are persistent, lasting nine months on average, and therefore measured subsequent negative returns cannot be due primarily to an easing of these constraints. Instead, negative returns from short constrained stocks result primarily because stock owners sell the constrained stock. Many common measures of short selling constraints in the literature actually measure persistent short selling constraints. 43.6% of all traded firms experience a persistent short-selling constraint episode lasting at least two months. Because persistent stock overpricing is predictable over long periods of time, CEOs and other insiders may be able to exploit it more easily