The 2007 market returns of Audit Integrity’s corporate ratings confirm that the best indicator of earnings quality is the integrity of corporate management.
Specifically, last year the best-rated companies had average returns 10.5% higher than the riskiest companies. The results were strongest in the extreme volatility months of June, July and November.
Audit Integrity rates more than 8,000 public companies on corporate integrity; that is the alignment of management and shareholders interests. This quantitative risk measure, called the Accounting and Governance Risk (AGR) rating, is based on a proprietary melding of forensic accounting and governance factors designed to evaluate management motivation, transparency and overall behavior. To improve investment returns, the AGR Equity Factor is available to investors to identify risks not found in other quantitative analyses.
“In 2007, investors who didn’t take corporate integrity into account were courting disaster. This quantitative measure held up while others failed, because corporate integrity becomes an increasingly prominent risk when the market is troubled. No other factor overlaps with our ratings, because we only analyse corporate behavior. Before even looking at the financial filings, the first concern must be whether the numbers can be trusted,” says James Kaplan, founder and chairman, Audit Integrity.
The 2007 findings are consistent with the results of a recent ten-year study of the AGR Equity Factor, showing broad spreads between the best and worst rated equities, according to market returns. Audit Integrity ratings have been proven to be reliable indicators of high-risk events that are devastating to stock prices, such as regulatory actions, shareholder litigation and financial restatements.
“What we saw in 2007 was consistent with what we have seen in the past there is a tangible benefit to investing in companies that are open and transparent. Our research, ratings and alerts offer a completely unique way for investors to eliminate ‘time bombs’ from their portfolios and increase returns by investing in corporate integrity,” adds Jack Zwingli, CEO, Audit Integrity.