Market Madness? The Case of Mad Money

Abstract:     
We study the market's reaction to Jim Cramer's recommendations on the television show Mad Money. Average abnormal overnight returns following his recommendations are over 3% for the entire sample, and 6.7% for stocks in the smallest quintile. Using a novel dataset of television viewership, we find that the price response is increasing in the number of wealthy viewers who watch the show but unaffected by the number of low income households viewing the recommendations. Consistent with theories of limits to arbitrage, we find that the overnight return is strongest for stocks with high idiosyncratic volatility. Using data from an ECN, we show that the market's response to the recommendations is immediate even though the show airs after the NYSE's trading hours. These price spikes are followed by partial reversals, and short-selling is significantly higher than normal on the day following the recommendations. Equity lending rates are higher in the days following the recommendations, especially for stocks with the largest overnight returns, suggesting that short-selling does not completely eliminate the mispricing in part because it is costly for short-sellers to do so.

Keywords: market efficiency, Mad Money, Jim Cramer, stock recommendations, CNBC, investor attention

JEL Classifications: G14, G11, C15

Working Paper Series