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A good job only in identifying poor convertible debt performance.
The Value Line Investment Survey is a weekly investment advisory service that uses publicly available information and analyst judgment to provide common stock performance recommendations. Value Line sorts its universe of common stocks into five groups on the basis of expected future relative performance. Securities that are given a rank of 1 are considered undervalued, while rank 5 securities are considered overvalued.
Performance studies by Black [1973], Holloway [1981], Copeland and Mayers [1982], Stickel [[1985], and Peterson [1987, 1995] evaluate Value Line common stock recommendations and show that they are capable of generating excess returns for investors. This anomalous finding has been described as the "Value Line enigma."1
Value Line also provides performance recommendations for two other classes of financial securities. Option recommendations are published in Value Line Options; convertible debt and warrant recommendations are published in Value Line Convertibles.2 Broughton and Chance [1993] study the Value Line Options recommendations and document significant excess returns on call options in the period immediately following the publication date. This finding suggests that Value Line appears to provide superior performance forecasting for securities other than common stock.
An examination of Value Line's recommendations for convertible debt is a natural extension of previous research that allows us to focus on Value Line's ability to forecast factors not included in its common stock recommendations, such as the direction of future interest rate movements, expected changes in credit risk, and the volatility of the underlying asset.
We examine the predictive content of the recommendations from the Value Line Convertibles publication. While other studies focus only on Value Line's ability to identify mispriced securities, our study explores two issues:
Can Value Line Convertibles identify mispriced securities?
Does Value Line Convertibles provide investors with information beyond that already included in the common stock recommendations?
The second issue examines whether Value Line's rankings of convertible debt simply exploit its analyses of common stocks or use additional information. For example, if Value Line gives a rank of 2 to a convertible bond and a rank of 1 to the underlying common stock, does this reflect additional analysis or simply the observation that convertible bonds are hybrid securities that have equity warrant and straight debt...