Overproduction, Aggregate Earnings Growth and GDP Growth

• In Event: Taking the Pulse of The U.S. Economy Using Accounting Data

Abstract

Konchitchki and Patatoukas (2014) find that aggregate accounting earnings growth is positively related to both future gross domestic product (GDP) growth and future GDP growth forecast errors. We complement and extend their findings by investigating whether and how overproduction, a type of real earnings management activities, moderates these associations. We find that the positive association between aggregate earnings growth and the realized GDP growth for each of the subsequent three-quarters is attenuated when firms overproduce inventories, primarily due to the temporary increase in current earnings as a result of overproduction. Furthermore, we find that the positive association between current aggregate earnings growth and two-quarter-ahead future GDP growth forecast errors is weaker with overproduction, providing some support for our conjecture that macro forecasters do not fully incorporate the incremental effect of overproduction on future GDP growth.

Authors

• Bjorn N Jorgensen, london school of economics and political science

• Yong Gyu Lee, Sungkyunkwan University

• Hyung il Oh, University of Washington Bothell