Aggregate Financial Misreporting and the Predictability of U.S. Recessions and GDP Growth
The Accounting Review, Vol. 98, No. 5, September 2023, pp. 129-159 https://doi.org/10.2308/TAR-2021-0160
51 Pages Posted: 12 Mar 2021 Last revised: 14 Sep 2023
Date Written: November 18, 2022
Abstract
This study examines the incremental predictive power of aggregate measures of financial misreporting for recession and real GDP growth. We draw on prior research suggesting that misreporting has real economic effects because it represents misinformation on which firms base their investment, hiring and production decisions. We find that aggregate M-Score incrementally predicts recessions at forecast horizons of five to eight quarters ahead. We also find that aggregate M-Score is significantly associated with lower future growth in real GDP, real investment, consumption, and industrial production. Additionally, our result that aggregate M-Score predicts lower real investment one to four quarters ahead partially accounts for why misreporting predicts recessions five to eight quarters ahead. Our findings are weaker when we use aggregate F-Score as a proxy for misreporting. Overall, this study provides novel evidence that aggregate misreporting measures can aid forecasters and regulators in predicting recessions and real GDP growth.
Keywords: Recessions, GDP Growth, Prediction, Financial Misreporting
JEL Classification: M41; E17
Suggested Citation: Suggested Citation