Mad Money stock recommendations: market reaction and performance

Abstract

We examine the stock recommendations of Jim Cramer televised on CNBC’s Mad Money, and document significant market reactions (i.e., announcement returns and volume) to Cramer’s recommendations, particularly for small capitalization stocks. The following findings indicate that the announcement returns are primarily due to price pressure from uninformed trading as opposed to the recommendations providing new value related information: announcement returns reverse following buy recommendations; bid-ask spreads temporarily decline; and there is no evidence of positive longer-term abnormal returns. One implication, when considered in combination with other works, is that investors should be cautious in following stock recommendations announced in the mass-media.

Appendix: The Michaely et al.’s test for abnormal volume

This appendix details our application of the Michaely et al. (1995) test statistic for abnormal volume. Let TO denote daily turnover computed as volume divided by total outstanding shares for a stock. Compute mean TO for a 100 day pre-event period for each stock, as shown in Eq. 4, where i denotes stock i and t denotes day t.

$$\overline {TOpre_i } = \frac{{\sum\limits_{t = - 125}^{ - 26} {TO_{i,t} } }}{{100}}.$$

(4)

Abnormal portfolio volume for day t is the computed as the average (for n stocks in the sample) of day t volume divided by mean pre-event volume, and then subtracting one:

$$AV_t = \left[ {\frac{{{\raise0.7ex\hbox{${\sum\limits_{i = 1}^n {^{TO_{i,t} } } }$} \!\mathord{\left/{\vphantom {{\sum\limits_{i = 1}^n {^{TO_{i,t} } } } {TOpre_i }}}\right.\kern-\nulldelimiterspace}\!\lower0.7ex\hbox{${TOpre_i }$}}}}{n}} \right] - 1.$$

(5)

The test statistic for abnormal volume, which we denote as t-stat 2 in Table 7, is calculated using a pre-event standard deviation:

$$t{\text{ - stat}}\;2 = \frac{{AV_t }}{{\sqrt {{\text{VAR}}\left( {AV_t } \right)} }}.$$

(6)

$${\text{Var}}\left( {AV_t } \right) = \frac{1}{{.99}}\sum\limits_{t = - 125}^{ - 26} {\left( {AV_t - \overline {AV} } \right)} ^2 .$$

(7)