Quality investing in CEE emerging markets

• Main Author: Adam Zaremba
• Format: Article
• Language: English
• Published: Vilnius Gediminas Technical University 2014-12-01
• Series: Business, Management and Education
• Subjects: cross-section of stock returns; quality investing; CEE stock market; Central and Eastern Europe; gross profitability premium; liquidity premium
• Online Access: http://journals.vgtu.lt/index.php/BME/article/view/3504

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.