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 impact 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.

Keywords: Individual investors, Analysts’ recommendations, Second-hand information, Style analysis

JEL Classification: G11, G12, G13