Quality Minus Junk

Clifford S. Asness, Andrea Frazzini, Lasse Heje Pedersen

Research output: Contribution to journalJournal articleResearchpeer-review

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.
Original languageEnglish
JournalReview of Accounting Studies
Volume24
Issue number1
Pages (from-to)34–112
Number of pages79
ISSN1380-6653
DOIs
Publication statusPublished - 2019

Keywords

  • Quality
  • Valuation
  • Accounting variables
  • Profitability
  • Growth
  • Safety
  • Analyst forecasts

Cite this

Asness, Clifford S. ; Frazzini, Andrea ; Pedersen, Lasse Heje. / Quality Minus Junk. In: Review of Accounting Studies. 2019 ; Vol. 24, No. 1. pp. 34–112.
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Quality Minus Junk. / Asness, Clifford S.; Frazzini, Andrea; Pedersen, Lasse Heje.

In: Review of Accounting Studies, Vol. 24, No. 1, 2019, p. 34–112.

Research output: Contribution to journalJournal articleResearchpeer-review

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