Country selection strategies based on quality

Abstract

Purpose

The purpose of this paper is to examine country-level parallels of the stock-level anomalies related to quality, i.e. profitability, leverage, liquidity, accruals, payout and turnover.

Design/methodology/approach

The study uses sorting and cross-sectional tests within a sample of 77 countries over the period of 1999-2014.

Findings

Markets populated with low-leveraged and cash-rich companies significantly outperform highly leveraged and cash-poor markets, respectively. The both cross-sectional patterns are stronger across small markets than across large ones. Furthermore, additional sorts on leverage and profitability markedly improve performance of cross-national value strategies. Finally, markets with companies with high-cash holdings earn additional premium in times of tight liquidity conditions.

Practical implications

Considering the diminishing benefits of international diversification in recent decades, investors should consider the country-level quality strategies in a strategic asset allocation, and not to postpone them to a later stage of the investment process. Furthermore, investments in cash-rich markets provide a hedge against liquidity distress.

Originality/value

The first study to comprehensively examine country-level quality effects across global stock markets.

Citation

Zaremba, A. (2015), "Country selection strategies based on quality", Managerial Finance, Vol. 41 No. 12, pp. 1336-1356. https://doi.org/10.1108/MF-03-2015-0082