Do Investment Newsletters Move Markets?

• Author: Eric Powers,Scott Brown,Jose J. Cao‐Alvira
• Published date: 01 June 2013
• Date: 01 June 2013
• DOI: http://doi.org/10.1111/fima.12004

Do Investment Newsletters Move

Markets?

Scott Brown, Jose J. Cao-Alvira, and Eric Powers∗

We analyze the market impact of stock recommendations made by a single investment newsletter

that focuses on instances of heavy insider trading. The market reacts positively to the actual

insider trades and the associated Form 4 Securities and Exchange Commission (SEC) filings

that attracted the newsletter’s interest. The subsequent recommendations, which occur within a

delay of several days, areassociated with an even larger announcement period return and higher

trade volume. Thus, despite the fact that recommendationsare largely based on publicly available

information on insider trades and the reach of the newsletter is limited, the newsletter has a

significant impact on the market.

Investment advice for retail equity traders comes from numerous sources including brokerage

houses and investment bank analyst reports, traditional print media, such as the Wall Street

Journal, television shows, such as Jim Cramer’s Mad Money, and subscription based newsletters.

Numerous studies have documented the short-term impact and long-term returns associated with

recommendations made by analysts, print media, and television shows.Our focus is on the impact

of newsletter recommendations. More specifically, we perform an in depth analysis of over 200

stock recommendations made by a single newsletter and assess whether a newsletter with a small

and well defined subscription base has the ability to impact market prices.

The newsletter that we focus on recommends stocks that haverecently experienced signif icant

insider purchases. Currently, the subscription price of this newsletter is $995 per year and has

circulation of slightly less than 10,000. This particular newsletter is interesting for severalreasons.

First, the newsletter’s recommendations are primarily based on data that is publicly available via

Form 4 Securities and Exchange Commission (SEC) filings. Additionally, the newsletter has

a relatively small subscriber base. During the time period of our sample, subscriptions grew

from 2,300 to slightly more than 10,000 individuals. Moreover, the newsletter administrator

states that these are almost entirely retail traders. Thus, the newsletter offers a microcosm of

information releases that are reasonably homogenous, limited in scope, and sent to a small set of

subscribers. Whether such a small subset of traders can have a perceptible impact on prices and

volume is an open question. In addition, the analysis of an individual newsletter is of interest for

assessing the efficacy of purchased financial advice, particularly in the context of subscription

We thank seminar participants at the University of South Carolina, the 2010 Financial Management Association Con-

ference, the 2010 Southern Finance Association Conference, D.H. Zhang, and several anonymous referees for helpful

comments.

∗Scott Brown is an Associate Professor of Finance at the Graduate School of Business Administration, University of

Puerto Rico, Rio Piedras Campus in San Juan, PR. He is also at University of South Carolina, 1705 College Street,

Columbia, SC. Jos´

e J.Cao-Alvira is an Associate Professor of Finance at the GraduateSchool of Business Administration,

University of Puerto Rico, Rio Piedras Campus in San Juan, PR and a Research Associate at the Business School of

the Universidad Sergio Arboleda in Bogota, Colombia. Eric Powers is an Associate Professor of Financeat the Moore

School of Business, University of South Carolina in Columbia, SC.

Financial Management •Summer 2013 •pages 315 - 338

316 Financial Management rSummer 2013

based newsletters. In particular, does holding the portfolio recommended by the newsletter justify

paying subscription fees, or would investors be better off with a much less sexy low cost index

fund?

The newsletter that we focus on promulgated 220 separate recommendations over a nine

plus year period from November, 2001 to December 2010.1We find that there is a significant

announcement effect associated with the newsletter’s recommendations. For the t=0tot+

1 event period, the average market model cumulative abnormal returns is 2.12% and is highly

statistically significant. Trading volume is also significantly greater than normal around the

release date. As with most studies of heavy purchasing by retail investors, there is evidence of

return reversal, but not for approximately 13 trading days following the event period.

Consistent with prior research on insider trading, there is also a significant announcement effect

associated with the initial Form 4 filings with the SEC. Cumulative abnormal returns for the t=0

to t+1 period for the heavy insider Form 4 filing dates preceding the newsletter release average

a statistically significant 1.98%. We also find significant abnormal returns when focusing on

the heavy insider trading days that necessitated the Form 4 filings. The average abnormal return

here, however, is smaller in magnitude at 1.03%. A variety of robustness checks suggest that

price increases subsequent to the newsletter’s recommendations are indeed attributable to retail

traders.

To assess the longer-term performance of the newsletter’s recommendations, we calculate

the recommended portfolio’s daily return, adding stocks to the portfolio on the day that they

were recommended, and removing stocks from the portfolio on the day that the stop-loss order

suggested by the newsletter was triggered. We then estimate a standard four factor regres-

sion model and find that the alpha is not significantly different from zero. Thus, newsletter

subscribers seem to be aggressively responding to recommendations that are ultimately value

neutral.

Due to a lack of publicly availableinformation, prior research regarding investment newsletters

is relatively sparse. Most studies of newsletters have privately obtained data from Marc Hulbert.

He publishes the Hulbert Financial Digest (HFD), a newsletter about newsletters. The primary

finding of the existing research is that newsletters demonstrate no ability to beat an appropriately

chosen benchmark, either via their equity/cash allocation recommendations (Graham and Harvey,

1996, 1997; Kumar and Pons, 2002) or via their specific stock picks (Metrick, 1999; Jaffe and

Mahoney,1999). Graham (1999) also uses data from HFD, but focuses on how analyst reputation,

ability,and the informativeness of public signals affects whether newsletterrecommendations herd

on Value Line’s recommendations or are idiosyncratic.

Our research differs from earlier research on newsletters in that we primarily focus on the

short run price and volume impact of the newsletter’s recommendations. Although we focus on

recommendations of a single newsletter, our results highlight several issues. First,we provide an

in depth analysis of the impact of the newsletter industry.Additionally, our research demonstrates

that parsimonious information sent to a small coterie of newsletter subscribers can have a greater

impact than diffuse information (like SEC filings) that is available to all investors. Finally, the

absence of positive excess buy-and-hold returns, coupled with the short-term impact of the

newsletter recommendations, suggests that subscribers are ultimately “tilting at windmills” and

might be better served by simpler passive investment strategies.

1One of the authors has a business relationship with the firm that publishes this, as well as several other newsletters. This

research, however,is independent of that business relationship.