In this study we provide an overview of common quality definitions that are currently used in the industry and those used in academic studies, and we outline the differences between these definitions. We show that there is a large dispersion in the definitions that are used for the quality factor with ‘industry’ definitions ranging from return-on-equity and profit margins to leverage and earnings variability, and ‘academic’ definitions such as operating accruals, net stock issues, and gross profitability. We document large performance differences between the different quality definitions. While ‘academic’ definitions for quality all seem to have significant predictive power for stock returns above and beyond common factors, we do not find significant predictive power for individual ‘industry’ definitions. Our results have important implications for the design of investment vehicles that provide investors exposure to the quality factor.

Additional Metadata
Keywords Quality, factor premiums, return-on-equity, profit margins, leverage, earnings variability, operating accruals, net stock issues, gross profitability
JEL Hypothesis Testing (jel C12), Portfolio Choice; Investment Decisions (jel G11), Asset Pricing (jel G12), Information and Market Efficiency; Event Studies (jel G14)
Persistent URL hdl.handle.net/1765/105108
Citation
Kyosev, G.S, Hanauer, M.X, Huij, J.J, & Lansdorp, S.D. (2016). Quality Investing – Industry versus Academic Definitions. Retrieved from http://hdl.handle.net/1765/105108