Firms’ Response to Macroeconomic Estimation Errors

57 Pages Posted: 2 Apr 2018 Last revised: 17 Feb 2021

See all articles by Oliver Binz

Oliver Binz

INSEAD

William J. Mayew

Duke University - Fuqua School of Business

Suresh Nallareddy

Duke University - Fuqua School of Business

Date Written: May 19, 2020

Abstract

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. We find that GDP estimation errors are positively associated with one-quarter-ahead changes in firms’ capital investments, production, inventory, and profitability. We also observe a long-run reversal in future profits, consistent with initial over (under) production eventually being met with declines (increases) in future profitability. These findings suggest that the initial managerial response to estimation errors generates a supply and demand imbalance. We confirm this imbalance at the macroeconomy level by documenting that a positive short-run aggregate investment response is followed by a long-run reversal. Managerial responses to the estimation error mimic the response to the true component of the GDP signal, suggesting that managers do not filter estimation errors during decision-making.

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 (May 19, 2020). Available at SSRN: https://ssrn.com/abstract=3151764 or http://dx.doi.org/10.2139/ssrn.3151764

Oliver Binz

INSEAD ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305
France

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
307
Abstract Views
2,401
rank
122,077
PlumX Metrics