What Is Quality?

Unlike standard factors, such as value, momentum, and size, quality lacks a commonly accepted definition. Practitioners, however, are increasingly gravitating to this style factor. They define quality to be various signals or combinations of signalssome that have been thoroughly explored in the academic literature and others that have received limited attention. Among a comprehensive group of the quality categories used by practitioners, we find that profitability, accounting quality, payout/dilution, and investment tend to be associated with a return premium whereas capital structure, earnings stability, and growth in profitability show little evidence of a premium. Profitability and investment-related characteristics tend to capture most of the quality return premium.