Articlegreen2017

From Accounting to Economics: The Role of Aggregate Special Items in Gauging the State of the Economy

45 citations0/0 files storedThe Accounting Review

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Auditing, Earnings Management, Governance Monetary Policy and Economic Impact Financial Markets and Investment Strategies

Abstract

ABSTRACT We propose and find that aggregate special items conveys more information about future real GDP growth than aggregate earnings before special items because the former contains advance news about future economic outcomes. A two-stage rational expectations test reveals that professional forecasters fully understand the information content of aggregate earnings before special items, but underestimate that of aggregate special items when revising their GDP forecasts. Using vector autoregressions, we show that aggregate earnings before special items has predictive ability for GDP because, as suggested by previous literature, it acts as a proxy for corporate profits included in national income. In contrast, aggregate special items captures changes in the behavior of economic agents on a timely basis, which, in turn, have real effects on firms' investment and hiring, as well as consumers' wealth and spending. Consistent with news-driven business cycles, we find that aggregate special items produces synchronized movements across macroeconomic aggregates. JEL Classifications: E01; E32; E60; M41.

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1988Testing for a Unit Root in Time Series Regression 2016Measuring Economic Policy Uncertainty*195317. A Value for n-Person Games 2009The Impact of Uncertainty Shocks 1997The conservatism principle and the asymmetric timeliness of earnings1 2015Measuring Uncertainty 1996Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?2010Correcting for Cross-Sectional and Time-Series Dependence in Accounting Research

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