GMI Ratings Research Finding: Companies with Bottom-Decile Accounting and Governance Risk (AGR®) Ratings 3.6 Times More Likely to Experience Major Drops in Stock Price

NEW YORK--(BUSINESS WIRE)--GMI Ratings, the leading provider of research on environmental, social, governance (ESG) and accounting-related risks affecting the performance of public companies, released today a study assessing the relationship between the firm’s proprietary Accounting and Governance Risk (AGR) ratings and the probability of significant drops in the prices of stocks.

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The study examined all the companies with market capitalizations of more than $100 million and share prices of at least $3 that experienced price drops of more than 70% in any year between 2001 and 2011. The analysis excluded 2008 data in order to avoid skewing the results with the anomalously frequent major price declines during that year. In aggregate, these screening criteria resulted in a total universe of 28,581 companies, 3% (872) of which experienced share price drops of 70% or more.

During the 10-year period covered by the study, companies with bottom-decile AGR ratings experienced major price drops (70%+) 3.6 times more frequently compared to companies with top-decile AGR ratings.

GMI Ratings’ Chief Executive James A. Kaplan said: “Since the creation of AGR, GMI Ratings has completed extensive statistical research on correlations between this proprietary measure of issuer risk and the probability of anomalous events likely to cause precipitous contractions in equity value. This research has yielded encouraging findings. The results of the present study have special resonance today against the backdrop of increasingly frequent man-made Black Swan events that can decimate portfolio returns.”

Ophir A. Gottlieb, GMI Ratings’ recently appointed Director of Custom Research, said: “We conducted tests of statistical significance for the frequency of 70% share price drops in the bottom and top deciles of AGR-rated companies. Relative to the average frequency of these events in the total universe of companies included in the study, our bottom-decile results satisfy a 95% test of statistical significance, while the top-decile results satisfy a 90% statistical significance. The difference between the top and bottom deciles satisfies a statistical significance test of greater than 99%.”

Mr. Gottlieb added: “Another way to interpret the data is that the frequency distribution based on AGR ratings is about three standard deviations away from the results we would have obtained – the average frequency of 3% -- without using AGR ratings.”

About GMI Ratings

GMI Ratings is an independent provider of research and ratings on environmental, social, governance and accounting‐related risks affecting the performance of public companies. The firm’s ESG ratings for nearly 5,500 companies worldwide incorporate 120 ESG KeyMetrics™ to help investors assess the sustainable investment value of corporations. The firm also provides Accounting and Governance Risk (AGR®) ratings and corresponding litigation probabilities for approximately 18,000 public companies worldwide. AGR metrics reflect the accuracy and reliability of a company’s financial reporting. Clients of GMI Ratings include leading investment managers, asset owners, insurers, auditors, regulators and corporations seeking to incorporate accounting and ESG factors into risk assessment and decision‐making. A signatory to the Principles for Responsible Investment (PRI), GMI Ratings was formed in 2010 through the merger of GovernanceMetrics International, The Corporate Library and Audit Integrity. In the 2012 Independent Research in Responsible Investment (IRRI) Survey conducted by Thomson Reuters Extel and SRI‐CONNECT.com, GMI Ratings was named “The Best Independent Corporate Governance Research Provider”. For more information please visit www.gmiratings.com.

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