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.
Originalsprog | Engelsk |
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Tidsskrift | Review of Accounting Studies |
Vol/bind | 24 |
Udgave nummer | 1 |
Sider (fra-til) | 34–112 |
Antal sider | 79 |
ISSN | 1380-6653 |
DOI | |
Status | Udgivet - 2019 |
Emneord
- Quality
- Valuation
- Accounting variables
- Profitability
- Growth
- Safety
- Analyst forecasts