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Financial sustainability is underrepresented in both the research on and practice of sustainability management and reporting. This article proposes a conceptual measure of financial sustainability and examines its association with capital market returns. The measure is positioned at the intersection of sustainability management, risk management and risk governance. Financial sustainability is regarded as a crucial control parameter complementing shareholder value and can be viewed by risk-averse investors as a secondary condition of investment decisions. It reduces refinancing and insolvency risks, leading to risk-adjusted excess returns in an imperfect capital market with financing restrictions and insolvency costs. We propose measuring a firm’s financial sustainability in terms of four conditions: (1) firm growth, (2) the company’s ability to survive, (3) an acceptable overall level of earnings risk exposure, and (4) an attractive earnings risk profile. We show that the application of a conditions-based investment strategy to European firms with high financial sustainability (i.e., firms fulfilling all four conditions) over the period from July 1990 to June 2019 results in monthly excess returns of 0.39%. This portfolio’s risk is lower than the risk of market investment. We find that the excess returns increase when incrementally adding each of the four conditions to the investment strategy.

This paper examines Nichols et al.’s ( 2017 ) fundamentals-based valuation model that links share prices to accounting fundamentals in European equity markets. The model explains, on average, 69 % of the cross-sectional share price variation among European firms. Deviations of share prices from the model’s fundamental value estimates hold unique information about subsequent stock returns that goes beyond established determinants of the cross-section. Firms identified as undervalued outperform firms perceived as overvalued by more than 0.54 % per month after controlling for firm size, book-to-market, operating profitability, investment, and momentum. Hence, the market seems to incorporate fundamental information only gradually.

Purpose: Financial sustainability is underrepresented in both research on and the practice of sustainability management and reporting. In this article, we examine empirically how financially sustainable firms performed in the Corona crisis.Methods: We measure financial sustainability by four conditions: (1) firm growth, (2) the company’s ability to survive, (3) an acceptable overall level of earnings risk exposure, and (4) an attractive earnings risk profile. We apply this measurement to investment portfolios of a broad sample of firms from 15 European countries of the MSCI Europe using typical investment portfolio characteristics.Results: We find that financially sustainable firms outperform both the broad market and firms with low financial sustainability for the time span July 2019 to March 2020.Conclusion: An investment strategy that invests in financially sustainable firms seems to be better capable of overcoming economic breakdowns such as the Corona crisis. We find that the returns increase with each of the four conditions that are included in the investment strategy. This underlines that considering financial sustainability is interesting for financial management, corporate governance and management control.

This paper tests Ahmed and Safdar's noise‐related fundamentals‐based explanation for the momentum premium in European equity markets. Consistent with the view that past price changes may be partially driven by noise, the future return behaviour of winners and losers is significantly dependent upon the degree to which past price performance is consistent with fundamentals. European momentum profits are concentrated among those firms where past price performance is congruent with fundamentals, but absent among those firms where past price performance is incongruent with fundamentals. The significantly different momentum premiums on congruent and incongruent fundamentals‐momentum strategies are attributable to the exploitation of existing mispricing among momentum stocks that can be ex ante identified using firm fundamentals.

Taking into account expected return characteristics like firm size and book-to-market in the selection of winners and losers helps to ex ante separate stocks with momentum from those that exhibit reversal in international equity markets. A strategy that buys small value winners and sells large growth losers generates significantly larger momentum profits than a standard momentum strategy, is robust to common return controls, and does not suffer from return reversals for holding periods up to 3 years. The superior performance of the strategy is attributable to a rather systematic exploitation of cross-sectional mispricing among momentum stocks.

Almost 20 years after its publication, Piotroski’s (J Account Res 38:1–41, 2000) FSCORE, the composite measure of the firm’s fundamental strength remains a strong predictor of subsequent stock returns and future profitability in international markets over the 2000–2018 period. Across developed non-US countries as well as emerging countries, high-FSCORE firms significantly outperform low-FSCORE firms by about 10% per year. Furthermore, FSCORE preserves its return-predictive power in all size segments after controlling for established cross-sectional return determinants, such as firm size, book-to-market, momentum, operating profitability, and investment. The findings are consistent with the view that fundamental information is only gradually incorporated into prices by investors.

High-rated ESG (environmental, social, governance) firms do not outperform low-rated ESG firms in international markets. However, ESG-rated firms in general outperform unrated firms after controlling for firm size, book-to-market ratio, momentum, operating profitability, and investment. The following explanations are provided for these observations. First, though higher ESG ratings predict higher operating profitability and lower investments, these positive return-generating firm characteristics are not priced within the universe of ESG-rated firms, causing the insignificant return difference between high-rated and low-rated ESG firms. Second, the positive excess returns of ESG-rated firms over unrated firms reflect price corrections arising from the reversal of investors’ expectation errors concerning the impact of ESG characteristics on the firm’s future fundamental performance and are therefore the outcome of mispricing.

Internationally-investing Islamic equity funds from developed Islamic and non-Islamic markets perform in general similar to the market. However, analyzing different market conditions, we provide evidence that funds domiciled in Islamic markets outperform their peers and funds from non-Islamic markets during market turmoil, irrespective of the applied performance measurement model. We suggest that this outperformance is owed to the expertise of fund managers from developed Islamic markets who operate in a financial environment that is driven by Islamic principles. Our results are robust with respect to the standard Fama-French three-factor and four-factor models as well as to the novel five-factor model.

The positive cash-return relation, previously found in the USA, is similarly present in international Europe, Australasia, and the Far East (EAFE) markets over the sample period 1990–2016. Across the 20 developed non-U.S. equity markets, high-cash firms outperform low-cash firms on average by 4.2% per year after controlling for firm size, book-to-market, momentum, operating profitability, and investment. Though the observed cash premium varies with the firm’s level of debt, a rational risk-based pricing view falls short of fully understanding the effect. Instead, the observed cash premium reflects price corrections arising from the reversal of investors’ expectation errors concerning the impact of cash on the firm’s future performance and is therefore the outcome of mispricing.

The information about expected returns contained in the size, value, profitability, and investment factors of Fama and French’s five-factor model is rendered insignificant in the presence of a systematic misvaluation factor. A parsimonious two-factor model consisting of the market factor and a systematic misvaluation factor provides in general a similar description of average returns as the five-factor model.

This article tests Piotroski and So's (2012) market expectation errors approach to value-growth investing in European equity markets. As in the USA, European value-growth returns are concentrated among firms with existent market expectation errors, but absent among firms without such errors which can be ex ante identified by interacting book-to-market with FSCORE, an accounting-based measure of the firm's fundamental strength. The returns to an expectation errors-based value-growth strategy are highly persistent for up to three years after portfolio formation, pervasive among large firms, and cannot be explained by common risk factors. However, consistent with a mispricing-based interpretation, prior external financing activities significantly influence these market expectation errors. A financing-based misvaluation factor can explain the return behavior of value-growth strategies formed along market expectations errors.

Analyzing more than 200 internationally-investing sustainably screened funds, we find that socially responsible, green, and faith-based investments have to be considered as different approaches within the broader field of sustainable investing. While socially responsible and green funds tend to underperform in non-crisis markets, faith-based funds perform similar to the market and their conventional peers during any market state. We provide evidence that the funds’ specific screening activity significantly impacts the financial performance of sustainable investing vehicles in international markets. In particular, social screens lead to the underperformance of socially responsible funds, while energy screens drive the performance of green funds.

The positive relation between the firm’s net payout yield (NPY) and subsequent stock returns, previously found in the United States, is similarly present in foreign international equity markets. That is, firms with high net payout yields significantly outperform firms with low net payout yields. The observed return effect is robust to common controls, such as firm size, book-to-market and momentum, as well as to recently proposed controls for investment and operating profitability. Consistent with the changing payout behavior of firms around the world, the net payout yield holds more cross-sectional information for predicting subsequent stock returns than the traditional dividend yield.

This paper extends the U.S. evidence in Bali et al. (2010) to European stock markets. Like in the United States, European value-growth returns are strongly dependent on the valuation signals contained in the firm’s equity financing activities. The high returns of value firms are due to value purchasers, while the low returns of growth firms are due to growth issuers. Among value issuers and growth purchasers, there exists no value premium at all. The large return difference between value purchasers and growth issuers cannot be explained by common risk factors. However, employing Piotroski and So’s (2012) recently proposed market expectation errors approach shows that the observed value-growth returns can be attributed to mispricing.

This paper assumes the role of advocatus diaboli by testing whether an investment in sin stocks can financially outperform an investment in socially responsible stocks. We create a set of global, regional, and domestic portfolios consisting of a large number of stocks belonging to what could be labeled as a sextet of sin: adult entertainment, alcohol, gambling, nuclear power, tobacco, and weapons. We assess the performance of sin stocks against well-known benchmarks, and rerun the identical assessment for socially responsible stocks. We find no compelling evidence that sin stocks, or socially responsible stocks outperform or underperform, and establish this result in several ways. Consistent with this finding, a hedge portfolio long in sin stocks and short in socially responsible stocks does not outperform the market, either. However, sin stocks are substantially tilted towards value, bear less market risk with an average beta below one, and are prone to momentum relative to socially responsible stocks.

This article comprehensively examines the performance, investment behavior, and co-movement of minimum-volatility, low-volatility, and low-beta strategies in international markets. First, the authors identify the significant overweighting of non-cyclical stocks from the consumer staples and utilities sectors, relative to the market, as one of the main, industry-specific return drivers of all low-risk strategies. Second, minimum-volatility, low-volatility, and low-beta strategies produce similarly substantial and statistically significant CAPM and three-factor model alphas in the segments of developed markets and emerging markets over the complete sample period, before and after the recent financial crisis. However, during the crisis, there was no significant outperformance, though low-risk strategies could keep risk down. All low-risk strategies share general commonalities with small-cap and value strategies, except in the European market, where they resemble growth strategies. Third, minimum-volatility, low-volatility, and low-beta strategies generally exhibit large and significant co-movements across and within markets. The authors do not find compelling evidence that one strategy generally dominates another. They conclude that minimum-volatility, low-volatility, and low-beta strategies are equally beneficial for participating in low-risk investing around the world.

From an international perspective, we find strong evidence that green investments are significantly different from SRI investments in terms of financial performance and underlying firm characteristics. Green equities outperformed SRI equities between 2003 and 2007, whereas they underperformed between 2008 and 2012 with absolute multi-factor alphas of more than 1 per cent per month in both directions. Green portfolios mainly contain stocks of low quality with weak business models that are highly capital-demanding but unprofitable, whereas SRI portfolios are principally characterized by stocks with well-conceived and profitable business models. We find that green investments can be considered as a sector bet on the renewable energy industry shaped by massive governmental subsidies during the mid-2000s.

This paper reexamines the issuance anomaly suggested by McLean, Pontiff, and Watanabe (2009) and the investment anomaly proposed by Titman, Wei, and Xie (2012) in international markets. We examine 40 non-U.S. stock markets across various aggregation levels. We find that international markets, unlike the U.S. market, demonstrate the following: (i) the issuance anomaly is not pervasive because it is largely linked to financial firms; (ii) the issuance anomaly is not persistent because it depends critically on monthly updating; and (iii) the evidence based on equal-weighted returns lends support to the issuance and investment anomalies, whereas the evidence from value-weighted returns is weak.

Recent empirical research shows that low volatility stocks outperform high volatility stocks around the world. This study documents that the volatility effect is associated with the quality of the firm using a large sample of international stocks. First, adding a quality factor to the Fama–French model contributes to the explanation of the volatility effect. Furthermore, the negative volatility–return relation is shown to be stronger and significant only among high quality firms which are profitable and have stable cash flows. Second, a fundamental investment strategy that goes long high quality firms and short low quality firms performs like a volatility strategy and cannot be explained by common asset pricing models. However, a low–high volatility factor adds to the explanation of the return difference between high and low quality stocks as volatility and quality strategies have a common component.

Nofsinger and Varma (2014) provide evidence that U.S. socially responsible funds outperform conventional funds during periods of market turmoil and, therefore, grant some crisis insurance. To investigate whether the U.S.-based evidence can be transferred to international markets, the authors analyze a comprehensive sample of internationally-investing socially responsible equity funds in a period from 2000 to 2012. As abnormal returns are model-specific, the authors apply standard and q-theory based performance measurement models. At first glance, the authors observe no crisis protection for internationally-investing socially responsible funds. However, splitting their sample in funds domiciled in North America, Europe, and Asia-Pacific to account for biases due to the origin of a fund, the authors find that socially responsible funds from North America outperform their peers in crisis periods irrespective of the applied performance evaluation model. The authors suggest that the U.S.-based evidence is restricted to internationally-investing funds domiciled in North America, and discover that this outperformance seems to be owed to the stock-picking abilities of North American fund managers and their advantage due to the nature of the North American market. Keywords: socially responsible investments, mutual funds, international markets, performance evaluation, managerial abilities. JEL Classification: G11, G12, G15, G23, M14

We examine the performance of Islamic equity indices in comparison to their conventional market benchmarks around the world. First, using a variety of alternative performance measures based on, e.g., lower partial moments, drawdown, and value at risk, we document that Islamic indices outperform in developed markets, while they tend to underperform in emerging markets. Second, the style analysis reveals that Islamic indices in developed markets exhibit a strong growth-orientation in their investment behavior, while they show a substantial large cap bias in emerging markets. Finally, the significant overweighting of stocks from the energy and materials sectors relative to the market is identified as one of the main performance drivers of Islamic indices.

In recent years, Islamic investing has emerged as a dynamic and quickly growing segment of the worldwide financial services industry. This article extends the international evidence to a much broader sample of 155 indices around the world. We contribute to the literature in several ways. First, using the Sharpe ratio, the CAPM, and the four-factor model, we find no evidence of an out- or underperformance of Islamic indices. Also, Islamic investing tends to have a growth and positive momentum bias. Both insights reconfirm results of previous studies. Second, we reexamine the performance of Islamic indices in bull and bear markets. Our evidence reverses prior results in the literature employing a different sample period. We interpret the evidence as Islamic screens not affecting unconditional performance through the cycle, but affecting performance conditional on the cycle in a manner which is, however, not easy to forecast. This is the price of Islamic investing bearing an unforeseeable chance or risk depending on the market climate. Third, we analyze the influence of screening methods on the performance of Islamic indices suggesting that there is no significant difference between Islamic screens and their performance.

We investigate the performance of the alternative three-factor model across markets. The important US evidence of Chen et al. (2010) in favour of the alternative model does not translate to a test setting using data from 40 non-US stock markets. The three-factor model of Fama and French provides persistently a better description of average returns. Our analysis is robust across developed and emerging markets, robust to alternative measures of investment and profitability, to seasonality effects, to size-segmented subsamples and subperiods, to various test assets, and to the two-stage cross-section regression approach to test for priced factors.

Sustainable and Responsible Investments (SRI) are booming in the US and Europe. In German-speaking countries, Switzerland is a leading force for SRI with an overall 2010 market volume of about US$45 billion, Germany’s SRI market covers middle ground with US$21 billion, while Austria’s is relatively small with US$3 billion. In this paper, we give a timely review on German-speaking countries’ attributes, responsible investment, and its legislation, whilst analyzing the financial performance and characteristics of socially responsible investments in the respective country’s stock markets. We focus on passive equity investments to obtain a most undistorted view on the performance and style of SRI strategies. The paper investigates two socially responsible investment strategies which are present in German-speaking countries: SRI in general and green investing in particular. First, both strategies do not have a performance which is different from conventional benchmarks controlling for well known characteristics. This inference is robust to five alternative asset pricing models using unconditional and conditional calendar-time factor regressions. Second, both socially responsible investment strategies have a higher systematic risk than their benchmark. Third, characteristics even beyond a size tilt are important in explaining responsible investment indices’ performance attribution like a momentum or an investment anomaly (both with negative coefficients).

In this paper, we empirically test the extent to which a portfolio of socially not responsible firms screened out of a market portfolio will trade at a discount. We create a set of global and domestic sin indexes consisting of a large number of publicly traded socially not responsible stocks around the world belonging to what we label as the Sextet of Sin: adult entertainment, alcohol, gambling, nuclear power, tobacco, and weapons. We compare their stock market performance directly with a set of virtue comparables consisting of the most important in-ternational socially responsible investment indexes. Employing a multi-factor performance measurement framework and recent boot-strap procedures for robust performance testing, we find no compelling evidence in the data that ethical and unethical screens lead to a sig-nificant difference in their financial performance.

Using an international sample from 1982 to 2008, we investigate the performance of global and 50 country-specific (28 developed and 22 emerging) fundamentally weighted portfolios compared to capitalization-weighted portfolios. First, we establish that superior performance of domestic portfolios diminishes considerably when applying a bootstrap procedure for robust performance testing. Second, after controlling for data snooping biases and the value premium, we find evidence of outperforming global fundamental indexes, but no compelling evidence of outperforming country-specific indexes.

Low-risk equals low return; high-risk equals high return. That traditional view has been debunked by academic research showing that a portfolio of low-risk stocks outperforms a portfolio of high-risk stocks, particularly in the US equity market. It has led to increasing interest in low-risk investing strategies by risk-averse institutional investors. Does this result hold for all international markets? Which low-risk strategy works best? This article pushes the research forward by investigating different sectors, countries and correlations of three low-risk strategies. In this report, the author offers some useful starting points for international investors. Christian Walkshausl, Associate Professor of Finance at the University of Regensburg in Germany, offers some useful starting points for international investors.