Learning more by aggregating less

45 Pages Posted: 9 Nov 2022

See all articles by Lindsey A. Gallo

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business

Hengda Jin

Texas A&M University - Mays Business School

Suhas A. Sridharan

Emory University - Goizueta Business School

Date Written: October 29, 2022

Abstract

We propose and find that aggregating a small number of earnings signals from highly macroeconomically exposed firms yields an informative leading indicator of future GDP. This challenges the convention of defining aggregate earnings using a comprehensive set of public earnings signals. Our findings suggest that aggregate earnings lead future GDP primarily through the information conveyed by this small subset of firms. We further find that this smaller aggregate relates to the wage and tax components, but not the corporate profits component, of GDP. Thus, our results question the view that there is a mechanical link between aggregate earnings and GDP. We shed light on the “black box” of how market participants form expectations by showing that forecasters across organizations fail to efficiently incorporate the news contained in top macro-exposed firms. Overall, our results highlight the importance of aggregation for forming macroeconomic expectations and clarify the mechanism underlying the relation between aggregate earnings and GDP

Keywords: aggregate earnings; Gross Domestic Product (GDP); corporate profits; forecasting

JEL Classification: E00, E01, E52, G17, G24, M41

Suggested Citation

Gallo, Lindsey A. and Jin, Hengda and Sridharan, Suhas A., Learning more by aggregating less (October 29, 2022). Available at SSRN: https://ssrn.com/abstract=4261461 or http://dx.doi.org/10.2139/ssrn.4261461

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)

Hengda Jin (Contact Author)

Texas A&M University - Mays Business School ( email )

460S Wehner Building, 4353 TAMU
College Station, TX 77840
United States

Suhas A. Sridharan

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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