Short Interest and Corporate Investment: Evidence from Supply Chain Partners

Abstract

We investigate whether short interest affects supply chain partners' investments. This investigation is important for understanding the real effect of short sellers in facilitating stakeholders' investment decisions. Prior research suggests that short interest conveys negative news in a timely manner, which predicts future deterioration in firm fundamentals. We predict and find that a supplier's future investments decrease with its major customers' short interest. Consistent with predictions, this result is more pronounced when customers' short interest is more informative about their future performance, when customers have a more opaque information environment, and when suppliers incur lower customer switching costs. The results are robust when we use various approaches to address endogeneity concerns and establish causality. Our findings suggest that short sellers provide valuable information to supply chain partners when making investment decisions.