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

See all articles by Messod D. Beneish

Messod D. Beneish

Indiana University - Kelley School of Business - Department of Accounting

David B. Farber

Indiana University - Kelley School of Business

Matthew Glendening

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Kenneth W. Shaw

University of Missouri at Columbia - School of Accountancy

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

Beneish, Messod Daniel and Farber, David B. and Glendening, Matthew and Shaw, Kenneth W., Aggregate Financial Misreporting and the Predictability of U.S. Recessions and GDP Growth (November 18, 2022). The Accounting Review, Vol. 98, No. 5, September 2023, pp. 129-159 https://doi.org/10.2308/TAR-2021-0160, Available at SSRN: https://ssrn.com/abstract=3790566 or http://dx.doi.org/10.2139/ssrn.3790566

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2628 (Phone)
812-855-4985 (Fax)

David B. Farber (Contact Author)

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Matthew Glendening

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States

Kenneth W. Shaw

University of Missouri at Columbia - School of Accountancy ( email )

420 Cornell Hall
Columbia, MO 65211
United States
573-882-5939 (Phone)
573-882-2437 (Fax)

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