Capturing the straw in the wind: do short sellers trade on customer information?

• Published in: Review of quantitative finance and accounting Vol. 58; no. 4; pp. 1363 - 1394
• Main Authors: Haw, In-Mu, Wang, Wenming, Zhang, Wenlan, Zhang, Xu
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.05.2022; Springer Nature B.V
• Subjects: Accounting; Accounting/Auditing; Corporate Finance; Customers; Earnings; Econometrics; Economics and Finance; Finance; Institutional investments; News; Operations Research/Decision Theory; Original Research; Profits; Sales; Short sales; Stock prices; Stocks; Suppliers; Supply; Supply chains; Trading; Private information; Supplier–customer relationship; Earnings announcement; Information environment; Short selling; Public information; G14; G2; L14
• ISSN: 0924-865X; 1573-7179
• DOI: 10.1007/s11156-021-01027-7

This study investigates whether short sellers trade the stocks of suppliers on customer information. Using the daily short-selling data derived from the Trades and Quotes-Regulation SHO database, we find that short sellers exploit the earnings news of major customers to trade the supplier stocks. Our cross-sectional tests show that short sellers’ trading on customer information is reduced when the suppliers and customers have common analysts or a higher percentage of common transient institutional investors, and is exacerbated for supplier–customer pairs when the supplier is more economically linked with the customer or when the short-sale constraint of the supplier is lower. Further analyses indicate that though short sellers’ trading on customer information is mainly driven by their superior ability to interpret the public information of the customers, we find some evidence that short sellers trade on private information of the customers. This study identifies the intermediary role of short sellers in incorporating customer-specific information into the supplier’s stock price and mitigating the supplier–customer anomaly. It adds to a growing body of studies on information transfer along supply chains.