Quality Investing in CEE Emerging Markets
Business, Management and Education, vol. 12, no. 2, pp. 159-180.
22 Pages Posted: 15 May 2015
Date Written: 2014
Abstract
Using sorting, cross-sectional tests, regression, and tests of a monotonic relation, the study examines the return patterns related to seven distinct quality characteristics: accruals, bid-ask spread, balance sheet liquidity, profitability, leverage, payout ratio and turnover. The investigation of more than 1.300 stocks from 11 Central and Eastern European countries for the period 2002-2014 documents a strong gross-profitability premium and an inverted liquidity premium. Profitable and not heavily leveraged companies provide a partial hedge against market distress. Finally, the paper proposes quality spreads as a forecasting tool and shows that they have predictive abilities over quality premiums related to leverage, profitability and bid-ask spread.
Keywords: cross-section of stock returns; quality investing; CEE stock market; Central and Eastern Europe; gross profitability premium; liquidity premium; leverage; bid-ask spread; accruals
JEL Classification: G11, G12, G14, G15
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