Market Madness? The Case of Mad Money

Abstract

We use the popular television show Mad Money hosted by Jim Cramer to test theories of attention and limits to arbitrage. Stock recommendations on Mad Money constitute attention shocks to a large audience of individual traders. We find that stock recommendations lead to large overnight returns which subsequently reverse over the next few months. The spike-reversal pattern is strongest among small, illiquid stocks that are hard-to-arbitrage. Using daily Nielsen ratings as a direct measure of attention, we find the overnight return is strongest when high income viewership is high. We also find weak price effects among sell recommendations. Taken together, the evidence supports the retail attention hypothesis of Barber and Odean (2008) and illustrates the potential role of media in generating mispricing. * We thank Brad Barber (the editor), the associate editor, and two anonymous referees for their suggestions. We have also benefited from discussions with Flavio de Andrade, Nick Barberis,

The Determinants of the Stock Price Performance of Analyst Recommendations

“…As indicated in Table 3 and Table 5, the coefficient on P/B is negative, as expected for the value effect, and significant at 0.6 and 0.8 quantiles for recommendations revealed through traditional media, regardless the exchange of listing. Turnover has a significantly positive effect for the Social/TWSE sample (consistent with the findings in Loh (2010) to the extent that Turnover is a valid proxy for investors' attention), while it has a significantly negative effect for the Social/TPEx firms (consistent with the evidence of Engelberg et al (2012) and the prediction in Amihud (2002), to the extent that Turnover is a valid proxy for liquidity). Note: *, ** and *** indicate statistical significance level at 10%, 5% and 1%, respectively…”

“…Stickel (1995) relate recommendation characteristics (the strength and magnitude of recommendation), brokerage house characteristics (marketing ability, analyst's reputation, size), and firm characteristics (firm size, earnings forecast revisions) to abnormal returns. Engelberg et al (2012) find that the temporary initial price effect is strongest among small and illiquid stocks, which usually do not have rich information environment and are hard to arbitrage. Huang and Hus (2006) find that the abnormal returns are positively related to information asymmetry (firm age, years of listing) and prior-period returns, and negatively related to turnover and firm size for Taiwan stock market.…”

“…The information hypothesis predicts a permanent price impact to reflect the information content provided by analysts' recommendations (Barber & Loeffer, 1993). Stickel (1985) report that the initial price effect is permanent in response to a ranking change in Value Line, while Engelberg et al (2012) document that the initial reaction is accompanied by a reversal for recommendations of Jim Cramer, host of the CNBC show Mad Money. Barber and Loeffler (1993) provide evidence of a partially mean-reverting price pattern, implying the existence of both effects.…”

“…Researchers collect stock recommendations released in several media formats. These include the ranking in subscription-based newsletters (e.g., Copeland & Mayers, 1982), news story in business magazines (e.g., Desai & Jain, 1995), news articles and recommendations in columns of newspapers (e.g., Barber & Loeffler, 1993;Tetlock, Saar-Tsechansky, & Macskassy, 2008), segments or shows on television stations (e.g., Engelberg, Sasseville, & Williams, 2012;Busse & Green, 2002), analyst forecasts in financial databases (e.g., Womack, 1996;Loh, 2010), and posts on internet social media (e.g., Antweiler & Frank, 2004;Chen et al, 2014). There are also studies that provide evidence on Taiwan stock markets (e.g., Lin, Lin, & Wang, 2009) for newspaper; Chiao, Lin, and Lee (2017) for TV show; Wu and Lin (2017) for mass media).…”

Lazy Prices

“…The latter shows that stock price drift is most pronounced for stocks with the least amount of institutional attention. Another novel measure of attention is by Engelberg, Sasseville, and Williams (2012), who show that spikes in TV ratings (presumably driven by retail investors) during the Jim Cramer "Mad Money" show are linked to an overreaction in stock prices for the companies recommended during the show. By contrast, in this paper, we document an acute form of investor inattention that impacts a large cross-section of firms, is centered on the most important corporate disclosures that firms make, and leads to large return predictability.…”