Tilting the evidence: the role of firm-level earnings attributes in the relation between aggregated earnings and gross domestic product

Abstract

We examine whether the contribution of firm-level accounting earnings to the informativeness of the aggregate is tilted towards earnings with specific financial reporting characteristics. Specifically, we investigate whether considering the smoothness of firm-level earnings increases the informativeness of aggregate earnings for future real GDP, and if so, whether macroeconomic forecasters use this information efficiently. Using recently-developed mixed data sampling methods, we find that the aggregate is tilted towards firms with smoother earnings and that this composition of aggregate earnings outperforms traditional weighting schemes. Further, this tilted aggregate has a stronger positive association with forecast revisions; in fact, analysts who utilize earnings the most in their forecasts appear to fully impound the informativeness of earnings smoothness. Our results synthesize and span parallel yet distinct streams of research on the role of accounting earnings in firm-level and macroeconomic outcomes and suggest an important role for financial reporting characteristics in the aggregate.

Does accounting details play an allocative role in predicting macroeconomic indicators? Evidence of Bayesian and classical econometrics in Iran

“…Leamer (2009) argues that overproduction at firm-level is a negative indicator of future economic growth. Moreover, more recent papers have paid incremental attention to the relationship between aggregate earnings and macroeconomic indicators so as to determine how such an aggregate relationship is affected by aggregate earnings specifications, such as earnings persistence (Abdalla and Carabias, 2017; Hann et al , 2017) and accounting conservatism (Crawley, 2015; Laurion and Patatoukas, 2016) and volatility (Dichev, 2013; Ball et al , 2018). Note that not only these earnings specifications represent firms’ overall reporting procedures in the economy but also reflect significant cross-sectional fluctuations that might be exploited to improve the informativeness of aggregate earnings (Ball et al , 2018).…”

Aggregate Earnings and (Un)employment Rate: Evidence from Nigeria

“…Second, we reinforce the inferences of [38] but in another dimension by considering the effects of other macroeconomic variables on the relationship between aggregate earnings and (un)employment changes. Finally, our study also adds to the aggregate earnings literature [20,5] by documenting evidence of aggregate earnings informativeness. The examination of accounting earnings and macroeconomic factors have been relatively unexplored in accounting and economic literature [51].…”

“…In consideration of the possible effect of specific financial reporting characteristics on the value relevance of aggregate accounting earnings at the macroeconomic level, [20] examined whether the impact of firm-level accounting earnings to the informativeness of the aggregate is moved towards earnings with specific financial reporting characteristics. The study first aimed at investigating whether considering the smoothness of firm-level earnings increases the informativeness of aggregate earnings for future real GDP, and if so, whether macroeconomic forecasters use this information efficiently.…”

“…The study first aimed at investigating whether considering the smoothness of firm-level earnings increases the informativeness of aggregate earnings for future real GDP, and if so, whether macroeconomic forecasters use this information efficiently. [20] adopted a recently developed mixed data sampling methods and revealed that the aggregate is moved towards firms with smoother earnings and that this composition of aggregate earnings outperforms traditional weighting schemes. The study further documented that this tilted aggregate has a stronger positive association with forecast revisions and that analysts who utilize earnings the most in their forecasts appear to impound the informativeness of earnings smoothness fully.…”

“…The study assumed that the relationship between uncertainty and economic growth is most pronounced when both firm-level and aggregate-level uncertainty are high simultaneously. [20] examined whether the impact of firm-level accounting earnings to the informativeness of the aggregate is moved towards earnings with specific financial reporting characteristics. [4] show that adverse changes in aggregate earnings predict future GDP growth, while positive changes in earnings do not.…”