Abstract
This study investigates the usefulness of aggregate accounting earnings and their components to predict GDP growth.This study shows evidence that net income, net operating income, other comprehensive income, and net income change at aggregate level could predict GDP growth. This study splits sample into developed and developing countries.Almost all of aggregate earnings components could predict GDP growth in developed countries.On the contrary, only other comprehensive income and net income growth could predict it in developing countries. Moreover, sensitivity analysis shows evidence that the predictive power of accounting numbers are more consistently found in developed countries. It implies that all economic activities of firms listed in developed countries’ stock exchanges fully reflect to that of macro economy. This reflection is better than those of in developing countries. We infer that the value relevance of accounting earnings and their disaggregation have reached not only in the capital markets but also in the national macroeconomy level.Indeed, this prediction seems dominantly to be accurate in developed countries only.
Highlights
If aggregate earnings as the bottom line can predict GDP growth [1], aggregate earnings components should
This study investigates the predictive value of aggregate earnings components to GDP growth
This study is unable to find any predictive ability of aggregate non-operating net income (t-stat.=1.37, p-value=0.17)
Summary
If aggregate earnings as the bottom line can predict GDP growth [1], aggregate earnings components should . Earnings disaggregation provides additional explanatory power [2] It implies that each earnings component provides different information relevance. This study investigates the predictive value of aggregate earnings components to GDP growth. Earnings informativeness studies at macroeconomy level take the position of “micro to macro” by investigating the relation between accounting and macroeconomic data [3]. Studies that associate aggregate corporate earnings and macroeconomic activity are still very limited in quantity [5]. Such studies are important because empirical findings at the firm level may not necessarily be used as a basis to draw inferences about earnings informativeness at macro level [6]
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