We study a dynamic general equilibrium model with costly-to-short stocks and heterogeneous beliefs. Costly short sales drive a wedge between the valuation of assets that promise identical cash flows but that are subject to different trading arrangements. In particular, we show that the price of an asset is given by the risk-adjusted present value of its future cash flows, which include both dividends and an endogenous lending yield that we characterize explicitly. This valuation formula implies that stocks with low and high shorting costs should offer similar risk-return trade-off once returns are appropriately adjusted for lending revenues and thus, sheds light on recent empirical findings about the explanatory power of shorting costs in the cross-section of returns.