Negative accounting earnings and gross domestic product
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Negative accounting earnings and gross domestic product Fabio B. Gaertner 1 & Asad Kausar 2 & Logan B. Steele 3 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Konchitchki and Patatoukas Journal of Accounting and Economics 57 (1-2), 76–88, (2014a) show that aggregate accounting earnings growth predicts future nominal gross domestic product (GDP) growth and that professional macro forecasters do not fully incorporate the information contained in aggregate accounting earnings. Based on results from prior literature, which find that accounting earnings reflect bad economic news in a timelier manner than good news, we condition Konchitchki and Patatoukas’s GDP growth forecast model on the sign of earnings changes. We show that negative changes in aggregate earnings predict future GDP growth while positive changes in earnings do not. Furthermore, we show that professional macro forecasters underreact to the information contained in negative changes in aggregate earnings about future GDP growth. Additional tests suggest our findings are a result of conservative accruals in earnings. Keywords Aggregate earnings . Gross domestic product (GDP) . Asymmetric timeliness JEL classifications E00 . E01 . M41
1 Introduction Konchitchki and Patatoukas (2014a) find that aggregate changes in earnings predict future nominal GDP growth and that professional macro forecasters do not fully Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11142-02009536-x) contains supplementary material, which is available to authorized users.
* Fabio B. Gaertner [email protected]
1
University of Wisconsin-Madison, Madison, WI, USA
2
American University, Washington, DC 20016, USA
3
Oregon State University, Corvallis, OR 97331, USA
F. B. Gaertner et al.
incorporate the predictive content of publicly available accounting earnings data. In this paper, we examine how the sign of the earnings change affects the usefulness of aggregate earnings in forecasting GDP. Accounting earnings have been shown to incorporate negative economic news in a timelier manner than positive economic news, as a result of accounting rules that accelerate the recognition of bad news (Watts 2003a). We argue this asymmetry in earnings should also be present in aggregate accounting earnings. As a result, we expect negative aggregate earnings changes to contain more timely information than positive changes. Our results show that the negative changes are more useful in predicting GDP than the positive ones. In fact, we find that positive changes have no predictive ability in forecasting GDP. The same pattern is true when predicting GDP forecast errors. We begin our empirical tests by replicating the work of Konchitchki and Patatoukas, to ensure our findings are not a result of differences in sample or variable construction. Consistent with their study, we find that aggregate earnings predict future nominal GDP growth as well as future nominal GDP growth forecast errors. We then allow the coeffic
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