Journal of Investment Strategies

The excess returns of “quality” stocks: a behavioral anomaly

do not use, Stefano Ciliberti, Augustin Landier, Guillaume Simon and David Thesmar

  • A portfolio that buys firms with higher levels of cash flows to assets ("high quality firms") and shorts those with lower cash flows to assets yields abnormally high returns. 
  • This stock-market anomaly (the "quality anomaly") cannot be explained by its risk-profile and is highly scalable. 
  • Our evidence suggests a behavioral explanation of the quality anomaly: Some market participants systematically underestimate the value of high quality firms.
  • Specifically, we document the following fact: In their price forecasts, analysts strongly underestimate the future stock-returns of high quality firms, compared to low quality firms.


This paper 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, is consistent with the efficient market hypothesis. The "behavioral view" 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 over-optimistic, analysts systematically underestimate the future returns of high-quality firms compared with those of low-quality firms.

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