Jim Cramer’s “Mad Money” Under Scrutiny

by Joseph Engelberg Caroline Sasseville and Jared Williams

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 find considerable evidence that Jim Cramer causes individual stock prices to temporarily rise when he recommends them on his CNBC show Mad Money. The causal interpretation is supported by the fact that prices rise in the precise hour his show airs and for stocks that have no other news. Interestingly, this effect exists even though there is no evidence of information in the recommendations. Calendar‐time portfolios which go long the recommendations before the show airs find no long‐term alpha. This suggests the initial price spikes constitute mispricing.

We also find that the size of the mispricing varies considerably in the cross‐section. When attention towards the recommendations is high or limits to arbitrage are great, we find much greater mispricing. Moreover, the size of the cross‐sectional variation is large. In a few cases, prices spike by more than 20% overnight (maximum = 32.8%, Table 3) following a Mad Money recommendation but limits to arbitrage still prevent “smart money” from correcting such distortions.

Taken together, the evidence here suggests that media endorsements of individual stocks may lead to substantial mispricing (Huberman and Regev [2001]) and that limits to arbitrage is a powerful friction which allows mispricing to persist.

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