Informed short selling: evidence from economically linked firms
ISSN: 1940-5979
Article publication date: 4 September 2020
Issue publication date: 22 October 2021
Abstract
Purpose
This paper examines how sophisticated and better-informed investors, such as short sellers, trade on information along the supply chain. Given the economic linkages between suppliers and customers, one would expect short sellers to trade on such information and to capitalize on investors' inattention to such economic links.
Design/methodology/approach
This paper uses both multivariate regression analysis and portfolio analysis where the time series averages of equally weighted monthly portfolio returns are reported to explore the abnormal returns of long-short trading strategies.
Findings
Results indicate that short interest predicts unexpected earnings news, consistent with short sellers extracting information from economic relationships. There is a strong negative relationship between short interest in the supplier firm and the one-month future stock return of the customer firm. This negative relation significantly persists for at least 12 months. One plausible channel explaining the information content of supplier (customer) firm's short interest for the customer (supplier) firms is the short sale constraints on the customer (supplier) firms.
Originality/value
The paper addresses a gap in the literature by examining whether short selling in a firm in the months leading up to a customer's (supplier's) negative shock is negatively correlated to the customer's (supplier's) future performance. Overall, the findings suggest that short sellers play an important role in the price discovery of related firms in the supply chain, which is beyond the direct effects documented in prior literature.
Keywords
Acknowledgements
The authors thank seminar participants at the University of Central Florida, and 2017 Southwestern Finance Association (SWFA) annual meetings, for helpful comments and suggestions on an earlier draft of this paper.
Citation
Hyder, F. and Khoshnoud, M. (2021), "Informed short selling: evidence from economically linked firms", Review of Behavioral Finance, Vol. 13 No. 5, pp. 522-542. https://doi.org/10.1108/RBF-12-2019-0186
Publisher
:Emerald Publishing Limited
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