Pre-Event Trading Based on Value Line’s Weekly Rank-Change Announcements

Abstract

This article investigates pre-event trading behaviors and investment returns surrounding Value Line’s weekly Timeliness rank-change announcements. The findings indicate that pre-event trading is accompanied by abnormal returns and volumes that are subject to rank changes. However, pre-event trading is not detected for stocks given Value Line Initial Reviews. Performance tests show that abnormal returns for pre-event trader portfolios are unexplained by a conventional four-factor asset-pricing model. Additional tests attest that pre-event traders generate superior performance, robust to adjustments for earnings shocks, transactions costs, size effect, and market conditions. With simultaneous upgrade and downgrade information, pre-event hedging strategies are further shown to be feasible and profitable. The authors contend that Value Line’s weekly Timeliness rank-change announcements generate abnormal returns for pre-event traders, exploiting an information asymmetry.

TOPICS: Security analysis and valuation, factor-based models