What Is Quality?
46 Pages Posted: 19 May 2017 Last revised: 10 May 2019
Date Written: July 11, 2018
Unlike standard factors, such as value, momentum, and size, quality lacks a commonly accepted definition. Practitioners, however, are increasingly gravitating to the style, defining quality as multi-signal for which some of the signals have been thoroughly explored in academic literature and others have received very limited attention. Among a comprehensive group of the quality categories used by practitioners, we find that capital structure, earnings stability, and growth in profitability show little evidence of premia, whereas profitability, accounting quality, payout/dilution, and investment tend to be associated with premia; further, profitability and investment-related characteristics tend to capture most of the quality-related premia.
Keywords: factor investing, multifactor, smart beta, quality factor, quality investing
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