Beyond junk: Evaluating quality premium’s influence on stock prices and returns in India before and after COVID

As a leading destination for investment among emerging markets, India’s unique governance challenges and evolving securities regulations make researching the quality factor in Indian firms crucial for informed investment, predominantly during an unparalleled crisis such as the COVID-19 pandemic. This study examines the impact of the quality minus junk (QMJ) factor, developed by Asness et al. (2019), on stock returns and prices in the Indian market using a panel of 567 non-financial firms listed on the BSE from October 2013 to September 2023, with factor construction following the Fama-French (1993, 2015) methodology. We observe a strong positive relationship between stock quality scores and the price-to-book (P/B) ratio, indicating that higher-quality stocks command a premium. Notably, the QMJ factor shows a significant positive impact on returns over time and during the pre-COVID period. However, a negative impact is observed in the post-COVID period. This study contributes valuable insights into the performance of quality factors across different periods, a context with scarce research in the Indian market.