Posted on March 3, 2021 by Wendy Frost
Always looking to gain an edge in the stock market, financial investors conduct extensive research before making any investment decision.
According to research by Ashwin Malshe, assistant professor of marketing at the UTSA College of Business, he has found a new resource for short sellers — customer satisfaction data.
“As a Ph.D. student I’d read a paper by one of my professors on short selling,” said Malshe, whose research focuses on measuring the impact of marketing strategy in financial markets. “The topic was fascinating, and I’ve followed short selling through the popular press over the years. My understanding was that short sellers use information that is not easily available and spend a lot of effort to collect this information from alternative data sources. That gave me the idea to link it to marketing variables.”
Short sellers borrow a security they don’t own and sell it on the market–planning to buy it back later at a lower price. They earn a profit if the security drops in price, but it is a risky practice most often utilized by finance professionals.
While past research has not shown an announcement effect when a publicly traded company’s customer satisfaction data is released annually, Malshe was curious to study the effects utilizing more frequent customer satisfaction and dissatisfaction data.
“Previously marketing researchers only looked at customer satisfaction and how it affects stock prices,” he said. “But given that short sellers are savvy, are they incorporating this data into their purchases? So, we decided to test this theory.”
The study by Malshe and his coauthors, “How Main Street Drives Wall Street: Customer (Dis) Satisfaction, Short Sellers and Abnormal Returns,” analyzed quarterly data from 273 firms over 11 years. Their paper is being published in the Journal of Marketing Research .
The American Customer Satisfaction Index publishes data yearly for each industry that is free to the public. But through the international market research firm, YouGov, Malshe found that data was released more frequently and included questions on customer dissatisfaction. However, this information came with a higher subscription price, limiting access for an average investor.
“Looking at quarterly frequency, we find that short sellers behave as if they are making use of this information,” said Malshe, who has taught at UTSA since 2016. “If customer satisfaction goes up, they unwind their position, such as with Tesla recently. And when customer satisfaction unexpectedly decreases, short selling for that company increases as well potentially causing a fall in the stock price.”
Although Malshe could not get investors to go on record that they utilize this practice, they have received positive responses from financial leaders that it is a practice that is employed.
“Short selling should be destigmatized,” said Malshe. “Without short selling, you only have positive information incorporated into the stock price, so stock prices become inflated.”
Malshe sees the study’s findings as a benefit to not only investors but also to corporations. “Boards should utilize this information to understand the value that customer satisfaction and dissatisfaction plays on stock prices.”
— Wendy Frost
