A Return Based Measure of Firm Quality

48 Pages Posted: 28 Sep 2020 Last revised: 14 Feb 2021

See all articles by Ravi Jagannathan

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Yang Zhang

The Options Clearing Corporation

Date Written: September 2020

Abstract

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)

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Suggested Citation

Jagannathan, Ravi and Zhang, Yang, A Return Based Measure of Firm Quality (September 2020). NBER Working Paper No. w27859, Available at SSRN: https://ssrn.com/abstract=3700687

Ravi Jagannathan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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National Bureau of Economic Research (NBER)

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Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

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Indian School of Business (ISB), Hyderabad ( email )

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India

Yang Zhang

The Options Clearing Corporation ( email )

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Chicago, IL 60606
United States

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