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4 lines
1.1 KiB
4 lines
1.1 KiB
["accrual", "cashflow", "earnings", "quality", "profitability", "stability", "volatility", "turnover", "ratio", "persistence"]
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Earnings Quality Premium Factor
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High-quality earnings are typically characterized by persistence, predictability, and low accrual components, reflecting stronger operating cash flow support and lower risk of financial manipulation. Behavioral finance suggests that investors often suffer from representativeness bias—overemphasizing headline earnings while neglecting the underlying quality—leading to systematic underpricing of firms with high earnings quality and thus generating long-term abnormal returns.
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Construct a composite earnings quality metric using financial statement data: first compute the ratio of accruals to total earnings, then integrate metrics such as operating cash flow to net income, earnings volatility, and asset turnover stability. Standardize and weight these components to form a cross-sectional ranking factor. Higher factor values indicate better earnings quality and are expected to predict higher future returns. |