Can Governance and Forensic Accounting Metrics Predict Stock Returns?

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

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.


About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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