Firms’ Response to Macroeconomic Estimation Errors
58 Pages Posted: 2 Apr 2018 Last revised: 19 May 2020
Date Written: May 19, 2020
Initial Gross Domestic Product (GDP) announcements are important economic signals that convey information on the state of the economy 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 profitability. Stronger profitability responses to GDP signal errors are observed for firms that are more sensitive to macroeconomic fluctuations. We also observe a reversal in future quarters’ corporate profits, consistent with initial over (under) production being met with declines (increases) in future profitability.
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
Suggested Citation: Suggested Citation