Country Selection Strategies Based on Quality

Abstract

Purpose: The aim 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 to 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.