Tilting the evidence: the role of firm-level earnings attributes in the relation between aggregated earnings and gross domestic product
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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.
KeywordsGross domestic product Aggregated earnings Tilt Mixed data sampling
JEL ClassificationE00 E01 M41
We appreciate helpful comments from Robert Bushman, Peter Easton (editor), Dennis Fixler, Rebecca Hann, Greg Miller, Zack Miller, Scott Richardson, Gil Sadka, Lakshmanan Shivakumar, an anonymous reviewer, and participants at the 2018 CARE conference on Firm-Level Information and the Macroeconomy and the Southern Economics Association’s Annual Meeting as well as seminars at the University of Iowa, the University of North Carolina at Chapel Hill, the University of Washington, and the University of Michigan’s Paton Center brown bag series.
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