To continue our pursuit of ESG investing, in this research, we zoom in on the corporate governance dimension. Quality can be viewed as a culture of compliance, transparency, integrity in business practices and good stewardship towards shareholders and other stakeholders. We search for these traits in financial statements and accounting choices. We investigate how a firm's fundamentals and accounting practices impact future stock returns and adverse corporate events (e.g., bankruptcy, late filing, regulatory investigation, and lawsuit).
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ESG investing has enjoyed unprecedented growth in recent years. In the US alone, there are currently over $12 trillion of ESG-integrated AUM, representing a 40% growth from 2016. We are launching a new research series called ESG Investment Strategy, with the goal of educating managers on how to best embrace ESG principles into their investment process.
As the 2020 US presidential election is approaching, a great deal of attention has been placed regarding who will win the Democratic nomination and who will eventually become the next president. According to the latest real-money betting market (PredictIt) and the polls, former Vice President Joe Biden and Senator Bernie Sanders are leading the Democratic contest.
In today’s highly competitive business world, technology and innovation are critical to a firm’s survival and prosperity. In this research, we tap into the domain of intellectual property – in particular, patent. By web scraping the US Patent and Trademark Office’s PEDS (Patent Examination Data System), merging with Google Patent Search Engine, and utilizing our NLP-powered entity recognition and mapping algorithms, we construct our proprietary Global Patent And Citation (GPAC) Database, covering over 1,000 public companies in the US and 1,500 firms in Europe, Asia, and Japan, with over 16 years of history.
A properly designed industry-specific model requires an in-depth understanding (domain knowledge) of the sector. Equipped with a large number of alternative databases (e.g., SNL property details and regional economics), we develop nearly 500 additional signals for the global real estate space. The performance decay of alternative signals tends to be more modest than conventional factors. More importantly, industry-specific factors add considerable diversification benefit to traditional investment styles.
This research continues our efforts of building stock selections models for the global public real estate market (including both REITs and property stocks). In Part I, we offered a thorough review of the investment universe (>800 REITs and property stocks globally), alternative data sources, and real estate stock selection factors.
Continuing our quest for alternative signals from unstructured textual data, in this research, we propose the Fifth Generation (5G) of our NLP/ML modeling framework. The focus of our 5G model suite is annual and interim corporate regulatory filings, sourced from the SEC’s EDGAR database for US companies and an alternative data vendor Mergent for international firms.
In finance and accounting, it is more about direction than absolute accuracy in most occasions, i.e., accounting materiality. For example, in the US, reported EPS is almost always rounded to the nearest cent rather than showing six decimal places. This seemingly innocent numerical rounding rule, however, may have serious unintended consequences. Company management is far more likely to be incentivized to round EPS upwards, a phenomenon known as Quadrophobia. We find there is a significant underrepresentation of digit four in the third decimal place in calculated EPS. Our findings show that Quadrophobia is pervasive in the US market and likely a result of accounting distortion by company management.
We extend our industry-specific research by introducing Part I of our global real estate stock selection series. Our models cover more than 800 stocks – consisting of both REITs and property companies globally.
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