Prophets of future corporate profits: a role for leading indicators in the information sets of security analysts?

Abstract

This article revisits a model developed by Levi (1980) designed to examine the ability of lagged money supply data to explain future corporate profits. Levi's original US study is developed here in two ways: firstly, it is reassessed using Japanese quarterly pre-tax profits for the period 1973 to 2000 and secondly the model is augmented to include Japan's composite leading index. While the composite leading index is found to have explanatory power at lead times of between 0 and 3 quarters-ahead, the money supply leads at times of between 3 and 5 quarters. In addition, the money supply exhibits the same peak-and-trough lag structure first identified in Levi's US study. This article demonstrates that while a composite leading index may provide short term explanatory power for corporate earnings, the money supply has a distinctive and significant role to play at longer lags. These results suggest that both indicators have a potentially significant role to play as elements within the information sets of secur...