Quality minus junk

Clifford S. Asness, Andrea Frazzini () and Lasse Pedersen
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Clifford S. Asness: AQR Capital Management
Andrea Frazzini: AQR Capital Management

Review of Accounting Studies, 2019, vol. 24, issue 1, No 2, 34-112

Abstract: Abstract We define quality as characteristics that investors should be willing to pay a higher price for. Theoretically, we provide a tractable valuation model that shows how stock prices should increase in their quality characteristics: profitability, growth, and safety. Empirically, we find that high-quality stocks do have higher prices on average but not by a large margin. Perhaps because of this puzzlingly modest impact of quality on price, high-quality stocks have high risk-adjusted returns. Indeed, a quality-minus-junk (QMJ) factor that goes long high-quality stocks and shorts low-quality stocks earns significant risk-adjusted returns in the United States and across 24 countries. The price of quality varies over time, reaching a low during the internet bubble, and a low price of quality predicts a high future return of QMJ. Analysts’ price targets and earnings forecasts imply systematic quality-related errors in return and earnings expectations.

Keywords: Quality; Valuation; Accounting variables; Profitability; Growth; Safety; Analyst forecasts (search for similar items in EconPapers)
JEL-codes: D84 G12 G14 G4 M4 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (35)

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DOI: 10.1007/s11142-018-9470-2

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