Aggregate Earnings and Why They Matter

Journal of Accounting Literature, Forthcoming

53 Pages Posted: 19 Dec 2014 Last revised: 8 Jan 2015

See all articles by Ray Ball

Ray Ball

University of Chicago - Booth School of Business

Gil Sadka

University of Texas at Dallas

Date Written: January 7, 2015


The accounting literature has traditionally focused on firm-level studies to examine the capital market implications of earnings and other accounting variables. We first develop the arguments for studying capital market implications at the aggregate level as well. A central issue is that diversification makes equity investors at least partially and potentially almost completely immune to several firm-level properties of earnings by holding diversified portfolios. Diversification is particularly important when assessing the welfare consequences of random errors in accounting measurement (imperfect accruals) and, to the extent it is independent across firms, of deliberate manipulation (earnings management). Consequently, some firm-level metrics of association, timeliness, value relevance, conservatism and other earnings properties do not map easily into investor welfare. Similarly, earnings-related risk manifests itself to equity investors largely through systematic earnings risk (covariation with aggregate earnings and/or other macroeconomic indicators). We conclude that the design and evaluation of financial reporting must adopt at least in part an aggregate perspective. We then summarize the literature in accounting, economics and finance on aggregate earnings and stock prices. Our review highlights the importance of studying earnings at the aggregate level.

Keywords: Aggregate Earnings, Aggregate Returns, Asset Pricing, Earnings-Returns Relation

JEL Classification: G12, M40, M21

Suggested Citation

Ball, Ray and Sadka, Gil, Aggregate Earnings and Why They Matter (January 7, 2015). Journal of Accounting Literature, Forthcoming, Available at SSRN:

Ray Ball

University of Chicago - Booth School of Business ( email )

Gil Sadka (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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