Does Earnings Growth Drive the Quality Premium?

38 Pages Posted: 13 Jun 2016 Last revised: 13 Jun 2018

Georgi Kyosev

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

Matthias X. Hanauer

Robeco Asset Management - Quantitative Strategies; Technische Universität München (TUM)

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: May 16, 2018

Abstract

High (low) quality stocks generate anomalously high (low) returns from the stand point of prominent asset pricing models. We provide a comprehensive overview of the 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 returns on stocks. Our results provide empirical evidence supporting the theoretical relation between profitability, investments, and expected stock returns, proposed by Fama and French (2015), across various markets, and thereby help better understand the existence of the quality anomaly.

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 X. and Huij, Joop and Lansdorp, Simon, Does Earnings Growth Drive the Quality Premium? (May 16, 2018). 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

Robeco Asset Management - Quantitative Strategies ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

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

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.fm.wi.tum.de/?id=31

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

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