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Quality acceleration and cross-sectional returns: Empirical evidence

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  • Ma, Yao
  • Yang, Baochen
  • Ye, Tao

Abstract

This study investigates the relationship between quality acceleration and cross-sectional returns, and explores the source of quality acceleration effect. We provide empirical evidence that quality acceleration positively and significantly predicts subsequent stock returns, and this predictive ability of quality acceleration lasts for three months, and does not reverse in the long term. These results are robust to alternative subsamples and alternative measures of quality acceleration, and common anomalies. The prediction information contained in quality acceleration is not subsumed by quality level and quality growth, and even exceeds the prediction information contained in quality level and growth. Consistent with a behavioral mispricing explanation, we find that the quality acceleration effect becomes stronger in the period of high investor sentiment, while the quality acceleration effect becomes weaker or even disappears in the period of low investor sentiment. However, the quality acceleration effect cannot be explained by limits to arbitrage and investor attention. Finally, quality acceleration has incremental predictive power for future one-quarter-ahead earnings growth, as well as future two- and three-quarters-ahead quality growth, which could be overlooked by investors.

Suggested Citation

  • Ma, Yao & Yang, Baochen & Ye, Tao, 2024. "Quality acceleration and cross-sectional returns: Empirical evidence," Research in International Business and Finance, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:riibaf:v:69:y:2024:i:c:s027553192400062x
    DOI: 10.1016/j.ribaf.2024.102269
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    More about this item

    Keywords

    Quality acceleration; Return predictability; Mispricing; Investor sentiment; Limits to arbitrage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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