Investing in Mad Money: Price and Style Effects

Abstract Individual investors have an incredible variety of sources for investment guidance. These include internet blogs, financial publications, books, newsletters and, of course, television shows. We examine a relatively new but widely popular source of investment advice, buy, and sell recommendations made by Jim Cramer on his popular nightly Mad Money show on CNBC. Our results suggest that Cramer's recommendations influence share prices of the companies that he mentions. The effects are short-lived and reverse for buy recommendations, although they persist for sell recommendations, and indicate momentum effects. Our analysis of a Cramer portfolio suggests that factor-adjusted returns are significantly different from zero for some subperiods. Factor analysis suggests that Cramer's portfolio returns are driven by beta exposure, smaller stocks, value-oriented stocks, and momentum effects. However, factor exposures change significantly during subperiods. Overall, the results suggest that, while Cramer may be entertaining and mesmerizing to many of his viewers, his aggregate or average stock recommendations are neither extraordinarily good nor unusually bad. © 2009 Academy of Financial Services. All rights reserved. JEL classifications: G11; G12; G13 Keywords: Individual investors; Analysts' recommendations; Second-hand information; Style analysis 1. Introduction Pity the individual investor. He or she must face the daily torrent of investment data and advice from any number of sources. There are the more traditional sources of information such as financial newspapers, magazines, newsletters. There is the more sophisticated, and costly option of engaging a financial advisor who may have CFP®, CFA®, CPA, CLU, PhD, or any other combination of professional designations appended to their name. There are endless financial websites brimming with data and financial blogs providing opinion on every tradable security known to man. There is research presented in academic journals testing various investment strategies. In addition, there is television, a superconvenient source of visiocentric information available in 98% of all U.S. households. One particular television program, targeting the individual investor is Mad Money, hosted by Jim Cramer. Mad Money is claimed to be the most-watched show on CNBC, with an authence in excess of 380,000 potential investors each weeknight. The objective of this research is to examine the nature and impact of stock buy and sell recommendations proffered by Cramer on his program. We examine the nature of the market impact of recommendations revealed on the show and explore the performance and style characteristics of a Cramer portfolio. The results provide insights into the performance of a popular but controversial market pundit and should be of interest to followers and detractors seeking to develop an active, or alpha-generating, investment strategy. The results also contribute to the literature on the impact of analysts' recommendations and second-hand information effects on stock prices. Jim Cramer's nightly Mad Money television program debuted on CNBC in March of 2005. On each episode, Mr. Cramer presents a high-energy discussion, often aided by costumes and props, of the market and makes recommendations on various stocks. The show and its value to individual investors are controversial. Hinchey (2007) notes that the Boston Globe argues that, "If Mad Money is a business primer, it's a crash course designed for the ADHD set;" whereas also noting that the show is CNBCs top-rated show among 18- to 54-year-olds. Blodget (2007) argues that Cramer gives terrible investment advice. Even Cramer himself, notes "God knows why, but there seems to be a market for this kind of idiocy" (Cramer, 2007). The controversy includes arguments about Cramer's investment performance and the value of the advice he dispenses on Mad Money. Hinchey (2007) argues that if every stock recommended by Cramer was purchased at the last price on the show date and then sold five days later, only a 0. …