From Accounting to Economics: The Role of Aggregate Special Items in Gauging the State of the Economy

53 Pages Posted: 17 Nov 2016 Last revised: 27 Feb 2017

See all articles by Ahmed Abdalla

Ahmed Abdalla

London School of Economics

Jose M. Carabias

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

Date Written: February 21, 2017

Abstract

We establish two channels for the flow of macroeconomic information from accounting earnings to the macroeconomy: a persistence channel via changes in accounting earnings before special items and a conservatism channel via recognition of special items. Prior studies using aggregate accounting earnings to forecast Gross Domestic Product (GDP) growth implicitly assumed only the former channel and have overlooked the substantial macroeconomic information content in the latter one. In this paper, we propose and find empirically that special items aggregate to dominate accounting earnings in forecasting and nowcasting GDP growth. We also find that professional macro forecasters incorporate information in earnings before special items in their forecasts and nowcasts but do not incorporate the information content of special items. This result is likely due to economic research discounting the information content of aggregate special items because National Income Product Accounts (NIPA) corporate profits are purged of special items. These findings provide an important step in understanding the distinct role of accounting for assessing future macroeconomic conditions.

Keywords: Aggregate Earnings, Special Items, GDP Growth, Accounting Conservatism, Persistence, Nowcasting

JEL Classification: E01, E32, E60, M41

Suggested Citation

Abdalla, Ahmed and Carabias, Jose M., From Accounting to Economics: The Role of Aggregate Special Items in Gauging the State of the Economy (February 21, 2017). Available at SSRN: https://ssrn.com/abstract=2871600 or http://dx.doi.org/10.2139/ssrn.2871600

Ahmed Abdalla (Contact Author)

London School of Economics ( email )

United Kingdom

Jose M. Carabias

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

Houghton Street
London WC2A 2AE
United Kingdom

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