Earnings Quality Factor

The three-gate gauntlet · genuine only if it clears all three and survives adversarial refutation

Gate 1

Survivorship-free

free

clean panel

Gate 2

Placebo ≥ P95

P100

outranked ~200 of 200 baskets

Gate 3

Cost-aware net

RF +1.76

positive net, certified

Genuine

Worst 12-month leg (RF)-0.65

−1.00 floor0

Every strategy here — winners included — loses in its worst 12 months. Depth is honest context, not the verdict.

Cleared all three gates and adversarial refutation — a market-neutral diversifier with a losing worst year, not a standalone strategy.

A cross-sectional equity factor that ranks companies by earnings quality — favouring firms whose reported earnings are backed by operating cash flow rather than accruals — and holds a long/short book rebalanced yearly.

What we found

Built with point-in-time fundamentals and a cash-backed earnings-quality measure, the long/short leg survives both a survivorship-free universe and a placebo test, indicating genuine one-sided rank-skill rather than luck. It is nonetheless crash-prone: the worst year had a negative risk-adjusted RF of -0.65, with 7 of 21 years negative, so it is a diversifying factor-leg, not a standalone tradeable strategy. The measured edge sits in the long quality leg; the short leg is net-negative, making the effect one-sided. For context, the raw monthly accrual decile ("accrual-anomaly") fails on turnover cost — the difference here is construction and low turnover, not signal cherry-picking.

How we tested it

2005–2026 test windowmodelled liquidity-aware costssurvivorship free

Tested on a survivorship-free 1077-name US common-stock panel, 2005-2026, with point-in-time fundamentals. Realistic modelled costs.
Placebo / robustness test: real result vs random baskets or shuffled signals (real vs the 95th percentile of random)

Source: Kozlov & Petajisto (2013), "Global Return Premiums on Earnings Quality, Value, and Size", SSRN (accruals: Hribar & Collins 2002)
Read the paper ↗

← The Academic Audit — all 54 studies

Research, not investment advice. “Validated” factor-legs are market-neutral diversifying building blocks with a losing worst year — none is a standalone tradeable strategy. Metrics are cost-aware and modelled (not live fills); the 2005–2026 test window is out-of-sample versus the source paper. Dollar figures are not returns and are omitted by design.