Country Selection Strategies Based on Quality
Managerial Finance, 2015, 12, 1336-1356.
41 Pages Posted: 12 Dec 2014 Last revised: 10 May 2016
Date Written: June 27, 2015
Purpose: The aim of this paper is to examine country-level parallels of the stock-level anomalies related to quality, i.e. profitability, leverage, liquidity, accruals, payout and turnover.
Design/methodology/approach: The study uses sorting and cross-sectional tests within a sample of 77 countries over the period of 1999 to 2014.
Findings: Markets populated with low-leveraged and cash-rich companies significantly outperform highly leveraged and cash-poor markets respectively. The both cross-sectional patterns are stronger across small markets than across large ones. Furthermore, additional sorts on leverage and profitability markedly improve performance of cross-national value strategies. Finally, markets with companies with high cash holdings earn additional premium in times of tight liquidity conditions.
Practical implications: Considering the diminishing benefits of international diversification in recent decades, investors should consider the country-level quality strategies in a strategic asset allocation, and not to postpone them to a later stage of the investment process. Furthermore, investments in cash-rich markets provide a hedge against liquidity distress.
Originality/value: The first study to comprehensively examine country-level quality effects across global stock markets.
Keywords: quality investing, leverage, cash-to-assets ratio, profitability, inter-market effects, cross-section of returns, factor returns, international diversification, country selection strategies, factor investing
JEL Classification: G11, G12, G15
Suggested Citation: Suggested Citation