Quality Minus Junk

Clifford S. Asness, Andrea Frazzini, Lasse Heje Pedersen

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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
Issue number1
Pages (from-to)34–112
Number of pages79
Publication statusPublished - 2019


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

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