Does Earnings Growth Drive the Quality Premium?

47 Pages Posted: 13 Jun 2016 Last revised: 16 Jan 2020

See all articles by Georgi Kyosev

Georgi Kyosev

Erasmus University Rotterdam (EUR), Rotterdam School of Management (RSM); Robeco Asset Management

Matthias X. Hanauer

Technische Universität München (TUM); Robeco Quantitative Investments

Joop Huij

Erasmus University - Rotterdam School of Management; Robeco; Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

Simon Lansdorp

Robeco Quantitative Strategies; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute

Date Written: January 16, 2020

Abstract

High (low) quality stocks generate anomalously high (low) returns above and beyond expected returns based on betas, market sizes, valuations, and momentum. We provide a comprehensive overview of commonly used quality definitions and test their predictive power for stock returns. We show that quality measures predict stock returns if and only if they forecast earnings growth, and that this information is not contained in other characteristics that have been shown to drive expected stock returns. At the same time, we find that the quality premium is unrelated to different measures of distress risk, and therefore inconsistent with a risk-based interpretation. Finally, our results are robust across different regions and carry over to the corporate bond market.

Keywords: quality, factor premiums, earnings growth, return-on-equity, profit margins, leverage, earnings variability, operating accruals, investments, gross profitability

JEL Classification: C12, G11, G12, G14

Suggested Citation

Kyosev, Georgi and Hanauer, Matthias Xaver and Huij, Joop and Lansdorp, Simon, Does Earnings Growth Drive the Quality Premium? (January 16, 2020). Available at SSRN: https://ssrn.com/abstract=2794807 or http://dx.doi.org/10.2139/ssrn.2794807

Georgi Kyosev (Contact Author)

Erasmus University Rotterdam (EUR), Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Matthias Xaver Hanauer

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.professors.wi.tum.de/fm/team/researcher/dr-matthias-hanauer-cfa/

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

HOME PAGE: http://www.robeco.com/en/insights/authors/matthias-hanauer.html

Joop Huij

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://www.rsm.nl/jhuij

Robeco

Rotterdam, 3014DA
Netherlands

HOME PAGE: http://www.robeco.com/

Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Simon Lansdorp

Robeco Quantitative Strategies ( email )

Rotterdam, 3011 AG
Netherlands

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,196
Abstract Views
4,526
rank
18,414
PlumX Metrics