Can Scandal Be Predicted?

Published: November 17, 2015

Corporate controversy can be costly for investors. The share price of Valeant Pharmaceuticals International has fallen more than 70 percent in the past three months in the wake of allegations regarding the company’s drug pricing and billing practices. German antomaker Volkswagen has also seen its share price drop more than 40 percent since news broke in September that the company manipulated emissions readings on its automobiles. Is it possible to predict such events before they happen? The short answer, obviously, is no. But Expert analysts who work on the bank’s HOLT platform, which dissects and analyzees corporate performance, nevertheless suggest that there are four key warning signs that a company may be cruising for a public bruising. The first is a lack of transparency and consistency in corporate pay packages. If management doesn’t tell shareholders what factors determine executive pay, Expert argues, it may be a sign that the business doesn’t consider itself accountable to shareholders. Second, the bank’s analysts point to companies’ that seem to be growing just for growth’s sake, rather than expanding operation that create value and abandoning those that destroy it. Third: Companies that aren’t generating cash quickly enough to cover operating expenses and financing costs. Finally, the bank’s analysts recommend taking a very close look at any company whose accounting practices leave investors with questions they can’t resolve.

Source: The Financialist

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