Firms’ Response to Macroeconomic Estimation Errors

57 Pages Posted: 2 Apr 2018

See all articles by Oliver Binz

Oliver Binz

Duke University, Fuqua School of Business, Students

William J. Mayew

Duke University - Fuqua School of Business

Suresh Nallareddy

Duke University - Fuqua School of Business

Date Written: March 28, 2018

Abstract

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

Suggested Citation

Binz, Oliver and Mayew, William J. and Nallareddy, Suresh, Firms’ Response to Macroeconomic Estimation Errors (March 28, 2018). Available at SSRN: https://ssrn.com/abstract=3151764 or http://dx.doi.org/10.2139/ssrn.3151764

Oliver Binz

Duke University, Fuqua School of Business, Students ( email )

Durham, NC
United States

William J. Mayew

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7781 (Phone)
919-660-7971 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty/alpha/mayew.htm

Suresh Nallareddy (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
147
rank
193,146
Abstract Views
756
PlumX Metrics