Quality minus junk
By Clifford S. Asness, Andrea Frazzini, Lasse Heje Pedersen. Review of accounting studies, 2018
190 citations recorded by the source corpus.
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.
Subfields: Tourism, Leisure and Hospitality Management
View Paper: https://www.semanticscholar.org/paper/ae40a8167065c89dc9c35baae19cebe454de7bf5
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In Tourism, Leisure and Hospitality Management
Citations in the corpus
- Size matters, if you control your junk (2018, unknown): “Table 2 then uses the latest version of the Asness et al. (2017) quality composite, which excludes payout and drops accruals from the growth composite.”
- A diagnostic criterion for approximate factor structure (2016, methodology): “Bai (2009), Moon and Weidner (2015) in a model with homogeneous regression coefficients βi = β for all i, and Ando and Bai (2015) for heterogeneous βi in balanced panels).”