Aggregate Earnings Surprises, Monetary Policy, and Stock Returns

50 Pages Posted: 25 Jul 2013 Last revised: 7 Dec 2016

See all articles by Lindsey A. Gallo

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business

Rebecca N. Hann

University of Maryland - Robert H. Smith School of Business

Congcong Li

Singapore Management University - School of Accountancy

Date Written: April 1, 2016

Abstract

This paper examines whether the negative association between aggregate earnings and returns is explained by the monetary policy news in aggregate earnings. Using Federal funds futures data to construct a measure of policy news, we find that aggregate earnings convey information about the Fed’s policy actions. Additionally, the negative aggregate earnings-returns association is muted when we control for policy surprises. This result is more pronounced in periods with negative policy surprises, which tend to trigger a more significant market reaction. Taken together, these results suggest that aggregate earnings convey policy news and the market reacts negatively to policy surprises, which drives the negative aggregate earnings-returns association.

Keywords: Aggregate Earnings; Monetary Policy; Stock Return; Federal Funds Futures

JEL Classification: E44, E52, M41

Suggested Citation

Gallo, Lindsey A. and Hann, Rebecca N. and Li, Congcong, Aggregate Earnings Surprises, Monetary Policy, and Stock Returns (April 1, 2016). Journal of Accounting & Economics (JAE), Forthcoming; Singapore Management University School of Accountancy Research Paper No. 2016-50. Available at SSRN: https://ssrn.com/abstract=2297490 or http://dx.doi.org/10.2139/ssrn.2297490

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
7347648243 (Phone)

Rebecca N. Hann (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Congcong Li

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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