The Real-time Information Content of Macroeconomic News: Implications for Firm-level Earnings Expectations

• In Event: Expected Earnings and Stock Prices

Abstract

This paper investigates the usefulness of the real-time macroeconomic news-flow as a leading indicator of firm-level end-of-quarter realized earnings. I find that the macroeconomic news flow strongly anticipates end-of-quarter earnings. However, macroeconomic news is not fully incorporated into market earnings expectations. Subsequently, using earnings announcements pricing tests, I demonstrate that this market failure translates into stock return predictability. These findings have three main implications for capital markets research in accounting. Firstly, they suggest that real-time macroeconomic could be used to update earnings expectations in real-time. Secondly, these findings open the door for developing new quarterly earnings time-series models that could compete with analyst forecasts. Thirdly, the information content of macroeconomic news is economically significant as evident from the magnitude of the risk-adjusted returns around earnings announcements.

Author

• Jose M Carabias Palmeiro, London School of Economics