From Micro to Macro: Does Conditional Conservatism Aggregate Up in the National Income and Product Accounts?

56 Pages Posted: 11 Jun 2015 Last revised: 17 Sep 2016

See all articles by Henry Laurion

Henry Laurion

University of Colorado at Boulder - Department of Accounting

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

Date Written: September 16, 2016

Abstract

We revisit evidence that conditional conservatism aggregates up from the firm level causing corporate profit estimates in the National Income and Product Accounts (NIPA) to be more sensitive to negative relative to positive aggregate return news. Our study delivers three main messages. First, annual estimates of NIPA corporate profits are designed to provide neutral estimates of income from current production regardless of whether times are good or bad. Second, we find spurious evidence of asymmetric sensitivity to aggregate return news in placebo test variables that are void of conditional conservatism, clearly indicating that an alternative explanation is in order. Third, we find that the variance of aggregate returns decreases with the level of economic activity. Although this return variance effect is unlikely to be attributed to accounting, it has the potential to generate spurious evidence of conditional conservatism at the macro level. Overall, our study highlights the importance of construct validity tests in archival studies and contributes to research in the properties of NIPA corporate profits.

Keywords: NIPA corporate profits; conditional conservatism; construct validity; placebo tests

JEL Classification: M41, G12, E43, E52

Suggested Citation

Laurion, Henry and Patatoukas, Panos N., From Micro to Macro: Does Conditional Conservatism Aggregate Up in the National Income and Product Accounts? (September 16, 2016). Available at SSRN: https://ssrn.com/abstract=2616573 or http://dx.doi.org/10.2139/ssrn.2616573

Henry Laurion

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

Panos N. Patatoukas (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://sites.google.com/site/panossom/

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