Firms’ Response to Macroeconomic Estimation Errors
57 Pages Posted: 2 Apr 2018
Date Written: March 28, 2018
Initial Gross Domestic Product (GDP) announcements are important economic signals but contain substantial estimation error. We investigate how GDP estimation errors affect firms’ real decisions and profitability. Consistent with theoretical predictions from the literature on macroeconomic signal errors, we find that GDP estimation errors are positively associated with one-quarter-ahead changes in firms’ capital investments, production, inventory and corporate profitability. Stronger sensitivities to GDP signal errors are observed for cyclical firms relative to less-cyclical firms. We observe some reversal in future quarters’ corporate profits for cyclical firms as a result of GDP estimation errors, consistent with over (under) production being met with declines (increases) in future profitability. Finally, financial analysts’ near term and longer term earnings forecasts are increasing in GDP estimation errors.
Keywords: Gross Domestic Product; Expectation errors; Profitability; Restatements; Analyst forecasts; Macroeconomy; Capital expenditures; Production
JEL Classification: E00, E01, E17, E20, E50, E60, G00, G28, G30, G31, M00, M20, M21, M40, M41
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