A Return Based Measure of Firm Quality
We show that superior performance relative to peers during stressful times identifies higher quality firms as measured by conventional historical financial statement based measures as well as default probability measures. Quality measured this way is persistent, but different from price momentum. Further, a managed portfolio that takes a long position in top quintile (Stable) firms and a short position in bottom quintile (Vulnerable) firms earns superior risk adjusted returns in excess of the risk-free rate. The portfolio has an annualized Fama and French three-factor alpha of 5.2% (t=5.04) and a five-factor alpha of 3.3% (t=3.38)
Yang Zhang completed the majority of this work as a postdoc in the Finance Department, Kellogg School of Management, Northwestern University, and the rest on her personal time. The views expressed in the article are the author's own and not necessarily those of the The Options Clearing Corporation. This work is not connected with (or funded by) The Options Clearing Corporation in any way. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.