Inflation and Nominal Financial Reporting: Implications for Performance and Stock Prices

Konchitchki, Yaniv

doi:10.2308/accr.00000044

Cited by 101 publications

(92 citation statements)

References 41 publications

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“…Real GDP, featured in the National Income and Product Accounts (NIPA) prepared by the Bureau of Economic Analysis (BEA), measures the inflation-adjusted value added at each stage of the production process of goods and services produced in the U.S. economy (BEA 2007). Although recent research focuses on the link between accounting data and nominal economic activity (Basu, Markov, and Shivakumar 2010;Cready and Gurun 2010;Shivakumar 2010;Konchitchki 2011;Kothari, Shivakumar, and Urcan 2013;Konchitchki and Patatoukas 2013;Patatoukas 2013), we focus on real GDP growth because we want to abstract from the link between accounting data and inflation.…”

Section: Background and Research Questionsmentioning

confidence: 99%

“…A long line of accounting research investigates the usefulness of financial statement analysis for forecasting future changes in firm fundamentals (Ou and Penman 1989;Penman 1992;Lev and Thiagarajan 1993;Abarbanell and Bushee 1998;Nissim and Penman 2001;Konchitchki 2011;Patatoukas 2012). Researchers typically use the ratio of operating income after depreciation to net operating assets, referred to as the return on net operating assets (RNOA), as a comprehensive measure of overall firm performance.…”

Section: Background and Research Questionsmentioning

confidence: 99%

“…Using financial statement analysis to forecast economic activities at the firm level has long been a topic of academic research in accounting (Ou and Penman 1989;Penman 1992;Lev and Thiagarajan 1993;Abarbanell and Bushee 1998;Nissim and Penman 2001;Konchitchki 2011;Patatoukas 2012). A key building block of financial statement analysis conducted at the firm level is DuPont profitability analysis, which decomposes a firm's accounting rate of return on net operating assets (RNOA)-the primary measure of a firm's core operating performance-into asset turnover and profit margin.…”

Section: Introductionmentioning

confidence: 99%

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Taking the Pulse of the Real Economy Using Financial Statement Analysis: Implications for Macro Forecasting and Stock Valuation

Konchitchki

Patatoukas²

2013

SSRN Journal

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In this study, we hypothesize and find that financial statement analysis of firm profitability drivers applied at the aggregate level yields timely insights that are relevant for forecasting real economic activity. We first show that focusing on the 100 largest firms offers a cost-effective way to extract information embedded in accounting profitability data of the entire stock market portfolio. We then show that accounting profitability data aggregated across the 100 largest firms have predictive content for subsequent real Gross Domestic Product (GDP) growth. We also show that stock market returns have predictive content for future real GDP growth, while their predictive power varies with the length of the measurement window with annual stock market returns being the most powerful. Importantly, we find that the predictive content of our indices of aggregate accounting profitability drivers is incremental to that of annual stock market returns. An in-depth investigation of consensus survey forecasts shows that professional macro forecasters revise their expectations of real economic activity in the direction of the predictive content of aggregate accounting profitability drivers and stock market returns. Although macro forecasters are fully attuned to stock market return data, their forecasts of real GDP growth can be improved in a statistically and economically significant way using our indices of aggregate accounting profitability drivers. Our findings suggest that professional macro forecasters and stock market investors do not fully impound the predictive content of aggregate accounting profitability drivers when forecasting real economic activity. In additional analysis, we examine the association between stock market returns and the portion of subsequent real GDP growth that is predictable based on our indices of aggregate accounting profitability drivers but that is not anticipated by stock market investors. We find that this portion is positively related to stock market returns, suggesting that the macro predictive content of aggregate accounting profitability drivers is relevant for stock valuation. Overall, our study bringsWe thank John Harry Evans III (senior editor), Kenneth A. Merchant (editor), and two anonymous reviewers for their comments and suggestions. We also thank Severin Borenstein, Sunil Dutta, Reut Laufer, Topseht Nonam, George Patatoukas, Mary Psyllaki, Andy Rose, and seminar participants at the University of California, Berkeley for helpful comments and suggestions. We gratefully acknowledge financial support from the Hellman Fellows Program and the Center for Financial Reporting and Management at the University of California, Berkeley, Haas School of Business.Editor's note: Accepted by Kenneth A. Merchant. Submitted: April 2012Accepted: July 2013 Published Online: October 2013 669 financial statement analysis to the forefront as an incrementally useful tool for gauging the prospects of the real economy that should be of interest to academics and practitioners.

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Section: Background and Research Questionsmentioning

confidence: 99%

Section: Background and Research Questionsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Taking the Pulse of the Real Economy Using Financial Statement Analysis: Implications for Macro Forecasting and Stock Valuation

Konchitchki

Patatoukas²

2013

SSRN Journal

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“…Our evidence on firms' downside fundamental risk sheds new light on the growing interdisciplinary research on the link between accounting and the macroeconomy, with implications for equity valuation (e.g., Chordia and Shivakumar 2005;Kothari et al 2006;Hirshleifer et al 2009;Konchitchki 2011Konchitchki , 2013Ang et al 2012;Konchitchki and Patatoukas 2014a, b;Li et al 2014;Curtis et al 2015;Shivakumar and Urcan 2015). In particular, we identify a source of firm-level risk that is linked to firms' sensitivities to downside macroeconomic patterns.…”

Section: Introductionmentioning

confidence: 99%

Accounting-based downside risk, cost of capital, and the macroeconomy

et al. 2015

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We hypothesize that earnings downside risk, capturing the expectation for future downward operating performance, contains distinct information about firm risk and varies with cost of capital in the cross section of firms. Consistent with the validity of the earnings downside risk measure, we find that, relative to low earnings downside risk firms, high earnings downside risk firms experience more negative operating performance over the subsequent period, are more sensitive to downward macroeconomic states, and are more strongly linked to earnings attributes and other risk-related measures from prior research. In line with our prediction, we also find that earnings downside risk explains variation in firms' cost of capital, and that this link between earnings downside risk and cost of capital is incremental to several earnings attributes, accounting and risk factor betas, return downside risk, default risk, earnings volatility, and firm fundamentals. Overall, this study contributes to accounting research by demonstrating the key valuation and risk assessment roles of earnings downside risk derived from firms' financial statements, also shedding new light on the link between accounting and the macroeconomy.

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“…According to Konchitchki (2016a), there are two typical Macro-Accounting areas, "Macro-to-Micro" and "Micro-to-Macro." The former research area, "Macro-to-Micro," tackles how various types of macroeconomic information affect or improve the firm-level prediction of future performance or stock valuation (e.g., Konchitchki 2011Konchitchki , 2013Li et al 2014;Williams 2015;Konchitchki et al 2016). "Micro-to-Macro," the latter research area, focuses on how accounting contributes to informing and predicting various macroeconomic aspects (e.g., Shivakumar 2007;Arif and Lee 2014;Shivakumar and Urcan 2014;Patatoukas 2014a, b, 2016a, b;Gallo et al 2016;Konchitchki 2016b).…”

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confidence: 99%

Market-Wide Cost of Capital Impacts on the Aggregate Earnings-Returns Relation: Evidence from Japan

Yoshinaga¹

2016

TJAR

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This study aims to clarify the mechanism of the surprising earnings-returns relation observed at the aggregate level by offering evidence from Japan. Unlike firm-level evidence, recent Macro-Accounting research reports that when earnings changes and stock returns of individual firms are cross-sectionally aggregated, a significantly positive relation cannot be observed in the U.S. market. To explain this puzzling finding, Kothari et al. (2006) propose a hypothesis that negative effects of changes in the market-wide cost of capital cancel out positive effects of aggregate earnings changes on aggregate stock returns. Although this hypothesis is empirically supported in the U.S market, the validity of this hypothesis has not been sufficiently investigated in the Japanese market. Thus, we test the hypothesis and find it robustly supported in Japan. Our results show that positive effects of aggregate earnings changes on aggregate stock returns are canceled out by the effects of the market-wide cost of capital. We also find that these canceling effects stem from the market risk premium in Japan. An additional test we conduct shows that expected aggregate earnings changes and changes in the market risk premium are JEL Classification: E44, G12, G14, M41

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Inflation and Nominal Financial Reporting: Implications for Performance and Stock Prices

Cited by 101 publications

References 41 publications

Taking the Pulse of the Real Economy Using Financial Statement Analysis: Implications for Macro Forecasting and Stock Valuation

Taking the Pulse of the Real Economy Using Financial Statement Analysis: Implications for Macro Forecasting and Stock Valuation

Accounting-based downside risk, cost of capital, and the macroeconomy

Market-Wide Cost of Capital Impacts on the Aggregate Earnings-Returns Relation: Evidence from Japan

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