The excess returns of “quality†stocks: a behavioral anomaly

Do Not Use, Stefano Ciliberti, Augustin Landier, Guillaume Simon and David Thesmar

Journal of Investment Strategies

Abstract: ABSTRACT This paper investigates the causes of the quality anomaly, which is one of the strongest and most scalable anomalies in equity markets.We explore two potential explanations. The "risk view", whereby investing in high-quality firms is somehow riskier, so that the higher returns of a quality portfolio are a compensation for risk exposure, is consistent with the efficient market hypothesis. The "behavioral view" states that some investors persistently underestimate the true value of high-quality firms. We find no evidence in favor of the "risk view": the returns from investing in quality firms are abnormally high on a risk-adjusted basis, and are not prone to crashes.We provide novel evidence;in favor of the "behavioral view": in their forecasts of future prices, and while being overall over-optimistic, analysts systematically underestimate the future returns of;high-quality firms compared with those of low-quality firms.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ6:2461640

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