Can Governance and Forensic Accounting Metrics Predict Stock Returns?

June 20, 2014 Leave a comment

Can Governance and Forensic Accounting Metrics Predict Stock Returns?

Ophir Gottlieb 

GMI Ratings
May 23, 2014
Rotman International Journal of Pension Management, Vol. 7, No. 1, 2014

Abstract: 
Arguably, governance and forensic accounting metrics should be predictors of future stock returns. Do empirical tests confirm this view? This article describes the logic and analytics used to calculate a metric called the Forensic Alpha Model (FAM), which was then used to test the hypothesis that it could predict future stock returns. The results of these tests, conducted with out-of-sample data, confirm that forensic accounting and governance metrics did indeed predict future stock returns. Implementing the FAM requires enormous data collection, detailed peering, industry normalizations, forensic accounting and governance taxonomies, sophisticated measures of association and interactions, rigorous testing, and advanced supervised machine learning.

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Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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