Tilting the Evidence: The Role of Firm-Level Earnings Attributes in the Relation between Aggregated Earnings and Gross Domestic Product

33 Pages Posted: 17 May 2018 Last revised: 30 Aug 2018

See all articles by Ryan T. Ball

Ryan T. Ball

The Stephen M. Ross School of Business at the University of Michigan

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: August 30, 2018

Abstract

We examine whether the contribution of firm-level accounting earnings to the informativeness of the aggregate is tilted towards earnings with specific financial reporting characteristics. Specifically, we investigate whether considering the volatility of earnings relative to the volatility of cash flows at the firm level (smoothness) increases the informativeness of aggregate earnings for future real GDP, and if so, whether macroeconomic forecasters use this information efficiently. This study innovates on recently developed mixed data sampling methods in the construction of an aggregate earnings growth measure by allowing each firm's contribution to the aggregate to vary as a function of earnings smoothness. We find that the aggregate is tilted towards firms with smoother earnings and that this composition of aggregate earnings outperforms traditional weighting schemes in the association with future GDP growth. Further, this tilted aggregate has a stronger positive association with forecast revisions; in fact, analysts who utilize earnings the most in their forecasts appear to fully impound the informativeness of earnings smoothness. Our results synthesize and span parallel yet distinct streams of research on the role of accounting earnings in firm-level and macroeconomic outcomes and suggest an important role for financial reporting characteristics in the aggregate.

Suggested Citation

Ball, Ryan T. and Gallo, Lindsey A. and Ghysels, Eric, Tilting the Evidence: The Role of Firm-Level Earnings Attributes in the Relation between Aggregated Earnings and Gross Domestic Product (August 30, 2018). Available at SSRN: https://ssrn.com/abstract=3179080 or http://dx.doi.org/10.2139/ssrn.3179080

Ryan T. Ball (Contact Author)

The Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
7347648243 (Phone)

Eric Ghysels

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://https://eghysels.web.unc.edu/

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