The Usefulness of Negative Aggregate Earnings Changes in Predicting Future Gross Domestic Product Growth

43 Pages Posted: 5 Sep 2015 Last revised: 3 Sep 2017

See all articles by Fabio B. Gaertner

Fabio B. Gaertner

University of Wisconsin - Madison - Department of Accounting and Information Systems

Asad Kausar

American University - Kogod School of Business; Nanyang Technological University (NTU); Nanyang Technological University

Logan B. Steele

Oregon State University

Date Written: September 1, 2017

Abstract

Konchitchki and Patatoukas (2014) (hereafter KP 2014) show that aggregate accounting earnings growth predicts future nominal Gross Domestic Product (GDP) growth and that professional macro forecasters do not fully incorporate the information contained in aggregate accounting earnings. Based on results from prior literature, which find that accounting earnings reflect bad economic news in a timelier manner than good news, we condition KP’s GDP growth forecast model on the sign of earnings changes. We show that negative changes in aggregate earnings predict future GDP growth, while positive changes in earnings do not. Furthermore, we show that professional macro forecasters underreact to the information contained in negative changes in aggregate earnings about future GDP growth. In additional analyses, we find evidence suggesting the incremental usefulness of negative earnings changes is driven by accounting conservatism rather than other drivers of asymmetric timeliness in earnings.

Keywords: Aggregate earnings, Gross domestic product (GDP), Asymmetric timeliness

JEL Classification: E00, E01, M41

Suggested Citation

Gaertner, Fabio B. and Kausar, Asad and Steele, Logan B., The Usefulness of Negative Aggregate Earnings Changes in Predicting Future Gross Domestic Product Growth (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=2656597 or http://dx.doi.org/10.2139/ssrn.2656597

Fabio B. Gaertner (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Asad Kausar

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Nanyang Technological University ( email )

Nanyang Business School
Singapore, 639798
Singapore

Logan B. Steele

Oregon State University ( email )

Corvallis, OR 97330
United States

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