Quality Investing: Evidence from the German Stock Market

Yannick A. B. Hupp & Johannes C. Gleich

Studenteropgave: Kandidatafhandlinger

Abstract

Prompted by ambiguous definitions of firm quality in academia and practice, this paper sets out to investigate different quality investing strategies in the German equity market from 1997 to 2021. To reflect its ambiguity, we measure firm quality through both single- and multidimensional metrics, based on annually reported accounting data. Subsequently, we build trading strategies upon these factors and analyze their performance using Fama-MacBeth crosssectional regressions, quality-sorted portfolios, and long-short factors. Across these analyses, we find compelling evidence of a quality premium being present in selected quality factors within the German stock market. Both one- and multi-dimensional factors capture the quality premium. On individual quality factor level, we report strong and statistically robust results for the cash flow-to-assets ratio, the debt-to-equity ratio, and the Lepetit factor, positioning these factors as the most informative quality signals in the German equity market. We further document that the performance of quality factors is predominantly driven by high-quality firms within the small-cap segment. This suggests that a broad range of investors can practically trade on quality signals, given that the profitability of the corresponding strategies is independent of short-selling abilities.

UddannelserCand.merc.fin Finance and Investments, (Kandidatuddannelse) Afsluttende afhandling
SprogEngelsk
Udgivelsesdato2022
Antal sider149
VejledereAnders Bjerre Trolle