The Excess Returns of ‘Quality’ Stocks: A Behavioral Anomaly

Author: Jean-Philippe Bouchard, Stefano Ciliberti, Augustin Landier, Guillaume Simon, David Thesmar

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.

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: or

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