Another Look at the Macroeconomic Information Content of Aggregate Earnings

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

Abstract

Prior research suggests that macroeconomists do not fully impound information from GAAP earnings into their GDP forecasts. This finding is surprising because macroeconomists do extract information from firms’ financial reports. We reconcile this research finding with the institutional context by suggesting that macroeconomists discard the non-core components of GAAP earnings, such as special items, that do not conform with the macroeconomic definition of corporate profits despite the fact that such components have significant macroeconomic information content. Our empirical results support these predictions. We find that the ability of aggregate earnings to incrementally predict GDP growth over other macroeconomic indicators is concentrated in the non-core components, such as special items. We further find that the previously documented inefficiency in GDP forecasts is driven entirely by inefficiency with respect to non-core earnings. Additional analyses suggest that the macroeconomic information content of non-core earnings stems primarily from the ability of aggregate special items to predict the overall level of corporate distress, as well as changes in worker compensation and corporate investments—the key components of GDI and GDP.

Authors

• Rebecca Hann, University of Maryland-College Park

• Congcong Li, Singapore Management University

• Maria Ogneva, University of Southern California