This paper provides robust evidence that short sellers exploit news of related firms to undertake profitable trades. Using newly available data on firm-level customer-supplier-competitor relationships and Reg SHO daily short sales data, we find that short selling of supplier stock increases with negative post-news customer returns, and that the relation becomes more pronounced in supplier information asymmetry. The results indicate that short sellers’ disproportionate trades in supplier stock on public releases of customer news are associated with lower future cumulative supplier stock returns. There is no significant relationship between short selling of the upstream supplier and downstream customer news in 3-party economic links, and short sellers do not trade supplier stock prior to customer news announcements. Overall, these results indicate an information intermediary role of short sellers in economically linked firms.

Keywords: Short Sales, News, Earnings Announcements, Customer-Supplier Relations

JEL Classification Number: G11, G23, G32