Value Line Investment Survey Rank Changes and Beta Coefficients

Abstract

With few exceptions, previous studies of the Line ranking system have concluded that Line rank changes are better predictors of stock price movements than asset pricing models. 1 In other words, an investor can generate excess returns (even net of transaction costs) by following Line rank changes. This Value Line enigma has often been cited as a counter example to the semistrong form of the market efficiency hypothesis, which asserts that stock prices instantaneously adjust to reflect all publicly available information, including Line rank changes, and that knowledge of such information cannot lead to excess returns. This note investigates the relation between Line rank changes and beta changes in an attempt to explain the Line enigma.