The Excess Returns of 'Quality' Stocks: A Behavioral Anomaly

11 Pages Posted: 18 Jan 2016 Last revised: 27 Nov 2017

See all articles by Jean-Philippe Bouchaud

Jean-Philippe Bouchaud

Capital Fund Management

Stefano Ciliberti

Capital Fund Management

Augustin Landier

HEC

Guillaume Simon

Capital Fund Management

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

Date Written: January 15, 2016

Abstract

This note investigates the causes of the quality anomaly, which is one of the strongest and most scalable anomalies in equity markets. We explore two potential explanations. The "risk view", whereby investing in high quality firms is somehow riskier, so that the higher returns of a quality portfolio are a compensation for risk exposure. This view is consistent with the Efficient Market Hypothesis. The other view is the "behavioral view", which states that some investors persistently underestimate the true value of high quality firms. We find no evidence in favor of the "risk view": The returns from investing in quality firms are abnormally high on a risk-adjusted basis, and are not prone to crashes. We provide novel evidence in favor of the "behavioral view": In their forecasts of future prices, and while being overall overoptimistic, analysts systematically underestimate the future return of high quality firms, compared to low quality firms.

Keywords: Quality anomaly, financial analysts misplaced focus, behavioral biases

JEL Classification: G00, G14, G20

Suggested Citation

Bouchaud, Jean-Philippe and Ciliberti, Stefano and Landier, Augustin and Simon, Guillaume and Thesmar, David, The Excess Returns of 'Quality' Stocks: A Behavioral Anomaly (January 15, 2016). HEC Paris Research Paper No. FIN-2016-1134. Available at SSRN: https://ssrn.com/abstract=2717447 or http://dx.doi.org/10.2139/ssrn.2717447

Jean-Philippe Bouchaud (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

Stefano Ciliberti

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Augustin Landier

HEC ( email )

France
+33630006051 (Phone)

HOME PAGE: http://https://sites.google.com/site/augustinlandier/

Guillaume Simon

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
16172259767 (Phone)

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