We investigate the return premium on stocks with high earnings quality using a broad and recent global dataset covering all developed markets from 7/1988 to 6/2012. We find that a simple strategy that is long stocks with high earnings quality and short stocks with low earnings quality produces a higher Sharpe ratio than the overall market or similar strategies betting on value or small stocks. This result holds both in the overall sample as well as in the more recent time period since 2005. Because the global earnings quality portfolio has a negative correlation with a value portfolio, an investor wishing to invest in both exposures can achieve significant diversification benefits.
Kozlov, Max and Petajisto, Antti, Global Return Premiums on Earnings Quality, Value, and Size (January 7, 2013). Available at SSRN: https://ssrn.com/abstract=2179247 or http://dx.doi.org/10.2139/ssrn.2179247