| This study aims to determine whether there is evidence of a strategy that contradicts the Efficient Market Hypothesis (EMH). EMH supports the position that an investor cannot consistently outperform the stock market due to the random nature in which information arrives, and the fact that prices react and adjust almost immediately to reflect the latest information.; To determine whether such evidence exists, the recommendations generated by the Value Line Investment Survey will be tested. The Value Line Investment Survey is a weekly investment advisory which ranks stocks into five groups according to their estimated performance in the following year. According to Value Line, stocks with a Timeliness rank of 1 are most likely to outperform the market while those with a rank of 5 are not expected to perform as well as the market.; Using the S&P 500 index as the measure of the market, a conventional t-statistic was used to test whether the return on Value Line Rank 1 Stocks was not significantly greater than the return of the market. Additionally, to determine whether market conditions impact the effect of Value Line's recommendations, three different time periods were tested: all five years under study (1997–2002), a period of a rising market (1997–1999), and a period of a declining market (2000–2001). Finally, the price change of Rank 1 stocks was tested using event study methodology and the calculation of Cumulative Average Abnormal Returns (CAAR). The methodology described above was also used to test whether the return of Value Line Rank 5 stocks was not significantly lower than the return of the market.; This study suggests that Value Line does not offer a conduit for the capture of abnormal returns. The Internet and other technological advances have greatly improved the availability of financial information. This availability of information, coupled with computerized trading strategies, has facilitated a more effective and efficient dissemination and processing of relevant information. Thus, exploiting market inefficiencies to obtain abnormal returns has become much more demanding, making Value Line ineffectual. |
