The Informativeness of Micro and Macro Information During Economic Crisis and Non-Crisis Periods: Evidence from Europe
33 Pages Posted: 17 Oct 2016 Last revised: 29 Apr 2018
Date Written: April 1, 2018
We investigate whether and how the information content of reported profitability and macroeconomic expectations changes when the state of the economy changes from non-crisis to crisis conditions. For this, we analyze data from sixteen European countries over the period 2005-2015. We find the macroeconomic expectations variable becoming significantly less informative in predicting future profitability in the crisis years. Current profitability as well as its cash flow and accruals components are much more informative predictors than macroeconomic expectations in both non-crisis and crisis economic conditions. Macroeconomic expectations show predictive ability only in the non-crisis years. Returns prediction tests suggest mispricing of the macroeconomic expectations only during non-crisis periods and support efficient pricing of current profitability under both non-crisis and crisis economic conditions. However, it is the cash flow component of earnings that is efficiently priced under both economic conditions, while the accrual component of earnings is mispriced during crisis periods. Overall, our findings suggest that the higher uncertainty during crisis periods decreases the precision of macroeconomic expectations and negatively affects their information content and pricing.
Keywords: economic crisis, macro information, micro information, profitability prediction, stock market valuation
JEL Classification: E00, E01, G14, M41
Suggested Citation: Suggested Citation