Quality Acceleration and Cross-Sectional Returns : Empirical Evidence

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 several months, and does not reverse in the long term. 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 quality 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