The Real-Time Information Content of Macroeconomic News: Implications for Firm-Level Earnings Expectations

45 Pages Posted: 23 Nov 2013 Last revised: 16 Dec 2017

See all articles by Jose M. Carabias

Jose M. Carabias

London School of Economics & Political Science (LSE) - Department of Economics

Date Written: December 14, 2017

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. Using recent advances in macroeconomics, I develop a nowcasting model for quarterly earnings and provide two main findings. First, I show that my model provides out-of-sample expectations that are as accurate as analysts’ forecasts. Second, macroeconomic news embedded in my nowcasts is not fully incorporated into investors’ earnings expectations and predicts future abnormal returns around earnings announcements. These findings have three main implications for capital markets research. First, real-time macroeconomic news can be used to update earnings expectations in real-time. Second, there are economic benefits of doing so, as evidenced by the magnitude of risk-adjusted returns around earnings announcements. Third, after three decades of almost nonexistent research on time-series models for quarterly earnings, the door is open again for fruitful research in this area.

Keywords: Macroeconomic News, Earnings Expectations, Market Efficiency, Return Predictability

JEL Classification: E32; G14; M41

Suggested Citation

Carabias, Jose M., The Real-Time Information Content of Macroeconomic News: Implications for Firm-Level Earnings Expectations (December 14, 2017). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2358454 or http://dx.doi.org/10.2139/ssrn.2358454

Jose M. Carabias (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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