Across market segments, decision-makers are looking for more holistic ways to study and mitigate issuer risk. Mainstream investment managers and insurers increasingly recognize that ESG and accounting-related risk metrics represent important – if not the most urgently needed – additions to the arsenal of any decision-maker mindful of the frequency and complex causes of adverse events stemming from variables typically overlooked in classical economic theories and approaches to risk modeling. Considered in aggregate, this research reinforces the following points:
- The basic character of global capital markets has changed dramatically. Volatility has increased as has the frequency of anomalous events that defy the predictive power of classical economic theories, including Modern Portfolio Theory (MPT) and the Efficient Market Hypothesis.
- The theoretical underpinnings of modern finance need to expand. By now, it is evident that much of the value destruction over the past decade resulted from operational and financial variables inadequately reflected in prevailing approaches to risk modeling and investing.
- Investment managers and insurers can significantly reduce their exposure to unanticipated and mispriced risks by incorporating governance, ESG, forensic accounting and other non-traditional risk metrics into stock screening and selection, portfolio risk assessment and, for active managers, day-to-day dialog with portfolio companies.
Reports and Essays on Forensic Finance
- Crimes Against Accounting (3/24/2014)
- Corporate Fraud Is Shockingly Common. Here’s How to Stop It (The Fiscal Times, 3/11, 2014)
- Do we really want to detect accounting fraud? (9/30/2013)
- Routine Anomalies: The Redefinition of “Black Swans” Continues (9/30/2013)
- Forensic Measures of Fragility: Investing in an Era of Systemically Mispriced Risk (5/28/2013)
- Centenarian Chain Smokers: Lessons about the Predictive and Explanatory Value of ESG Research (2/19/2013)
- The Rise of Routine Anomalies: Redefining Black Swans (12/19/2012)
- Diagnosing Fragility: The Promise of Forensic Accounting (11/19/2012)
- New Frontiers in Risk Modeling (8/2012)