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

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... ns are one to two percent lower per month for new entrants, and despite high costs it is profitable to short them. 120% J a n -2 0 J u l -2 0 J a n -2 1 J u l -2 1 J a n -2 2 J u l -2 2 J a n -2 3 J u l -2 3 J a n -2 4 J u l -2 4 J a n -2 5 J u l -2 5 J a n -2 6 J u l -2 6 J a n -2 7 J u l -2 7 J a n -2 8 J u l -2 8 J a n -2 9 J u l -2 9 J a n -3 0 J u l -3 0 J a n -3 1 J u l -3 1 J a n -3 2 J u l -3 2 J a n -3 3 J u l -3 3 J a n -3 4 J u l -3 4 Percent of loan crowd stocks