Essentially, the researchers argue in their March 15 report that those who rush to act on Cramer's picks at the start of the next trading day pump up the volume and the price of the share in question, which after a few days will inevitably fall like raindrops in Hana. The only folks who make money are those trading sophisticates who "short" Cramer's picks -- i.e., make bets that the stock price will fall.
As Engelberg summarizes: "Cramer pushes up prices about 5% overnight for the smallest stocks and about 2% overnight for our entire sample. However, the entire run-up in price (including the run-up due to information leakage) completely reverses within several trading days (i.e. stocks, on average, fall to their original prices)."
Asked for comment on the report, a CNBC spokesman complained of "huge holes and serious inaccuracies" and then followed up with a statement, which said in part that the report "is a 'working paper' and a posting from three students on a chat site."
The statement added: "Jim does not choose stocks in a vacuum -- he, like other professional investors, reacts to various news in the marketplace, such as a good quarter, a mention in other media, an analyst upgrade or a settlement of a lawsuit." (For the full statement, log on to latimes.com/channelisland).
We wanted to ask the biz school students for their reaction to CNBC's criticism, but the students were not available for comment. One staffer said many students and faculty are out this week for spring break.
Channel Island is a blog about the television industry. For the latest posting, go to latimes.com/channelisland. Contact reporter Scott Collins at email@example.com