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Does earnings growth drive the quality premium?

Author

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  • Kyosev, Georgi
  • Hanauer, Matthias X.
  • Huij, Joop
  • Lansdorp, Simon

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.

Suggested Citation

  • Kyosev, Georgi & Hanauer, Matthias X. & Huij, Joop & Lansdorp, Simon, 2020. "Does earnings growth drive the quality premium?," Journal of Banking & Finance, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:jbfina:v:114:y:2020:i:c:s0378426620300534
    DOI: 10.1016/j.jbankfin.2020.105785
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    More about this item

    Keywords

    Quality; Factor premiums; Earnings growth; Return-on-equity; Profit margins; Leverage; Earnings variability; Operating accruals; Investments; Gross profitability;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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