Aggregate Accounting Earnings Research Articles

Negative aggregate accounting earnings and gross domestic product: A perspective of conditional accounting conservatism at the macroeconomic level

This study explores the role of corporate accounting earnings in predicting GDP growth at a macroeconomic level. It investigates whether negative aggregate accounting earnings are more effective predictors of GDP growth than positive earnings and how macroeconomic uncertainty affects this predictive ability. The two main novelties introduced in this study are the integration of two distinct streams of research, namely, the usefulness of accounting earnings and conditional accounting conservatism at the macroeconomic level and the consideration of the moderating role of macroeconomic uncertainty. Data from 22 countries from 2008 to 2022 are analyzed using moderated regression analysis. The findings support the theory that negative earnings are better predictors of GDP than positive earnings, aligning with the conditional accounting conservatism perspective. Furthermore, this study also reveals that macroeconomic uncertainty specifically weakens the predictive strength of negative aggregate accounting earnings and aggregate operating income on GDP growth. This comprehensive insight underscores the critical importance of considering economic conditions when employing accounting earnings to forecast economic trends, emphasizing that negative earnings are particularly significant indicators during uncertain economic times.

The informational role of aggregate accounting earnings and their components in predicting GDP growth – evidence from Korea

The informational role of aggregate accounting earnings and their components in predicting GDP growth – evidence from Korea

Aggregate accounting earnings, special items and growth in gross domestic product: evidence from Australia

AbstractMacroeconomic analysts have been found to not take full account of aggregate accounting earnings when forecasting future growth in US gross domestic product (GDP). Using Australian data, we confirm this finding and find that the association between aggregate earnings and GDP growth is robust to inclusion of economic factors to capture the importance of the resources sector and the open nature of the Australian economy. We also find that this association is higher in the post‐IFRS period. Finally, we document that both aggregate earnings and negative special items are important for explaining future GDP growth and forecast errors.

Aggregate accounting research and development expenditures and the prediction of real gross domestic product

The role of accounting information for public policy making has received increased attention in recent years. Konchitchki and Patatoukas (2014a,b) demonstrate that growth in aggregate accounting earnings can predict future growth in nominal and real Gross Domestic Product (GDP). We extend the micro to macro literature by decomposing earnings into the R&D and pre-R&D components. Using the Almon (1965) finite distributed lag model, we find that both components can predict future real GDP growth with different lead-lag structures. Importantly, this decomposition significantly increases the explanatory power of the predictive model using accounting information. Aggregate accounting R&D can predict real GDP through the personal consumption, business investment, and net export channels of GDP. Our study extends prior research on the forecasting usefulness of accounting information at the aggregate level and has practical implications for macro forecasting and for public policy making regarding innovative activities of publicly listed firms.

Aggregate Accounting Earnings, Special Items and Growth in Gross Domestic Product: Evidence from Australia

Macroeconomic analysts have been found to not take full account of aggregate accounting earnings when forecasting future growth in U.S. gross domestic product (GDP). Using Australian data, we confirm this finding and find that the association between aggregate earnings and GDP growth is robust to inclusion of economic factors to capture the importance of the resources sector and the open nature of the Australian economy. We also find that this association is higher in the post-IFRS period. Finally, we document that both aggregate earnings and negative special items are important for explaining future GDP growth and forecast errors.

Aggregate Tone and Gross Domestic Product

We examine whether earnings announcement textual tone, aggregated across individual publicly traded firms, helps to predict future GDP growth. Prior literature shows changes in aggregate accounting earnings are useful in predicting future economic growth, but only when aggregate earnings changes are negative. Because conservative accounting rules limit managers’ ability to communicate positive news in a timely manner, we look to corporate narrative tone as a possible source of timely positive information disseminated by publicly traded firms. Our results show that aggregate tone is useful in predicting future economic growth, but only when the change in aggregate tone is positive. Our study contributes to prior literature by providing initial evidence on the link between qualitative accounting disclosure, accounting timeliness, and macroeconomic outcomes.

Negative accounting earnings and gross domestic product

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.

Effect of Accounting Earnings on Gross National Income: Evidence from Nigeria

This study investigates the effect of accounting earnings on the gross national income of Nigeria. We used a sample of 101 firms listed that are listed on the Nigerian Stock Exchange covering the twelve years from 2006 to 2017. We found a positive and statistically significant association between the gross national income and gross profit, earnings before interest and tax, profit after tax and the book value of equity. Besides, we documented that inclusion of macroeconomic variables in the model, enhanced the impact of aggregate accounting earnings on gross national income

Aggregate Earnings and (Un)employment Rate: Evidence from Nigeria

The purpose of this study is to investigate the association between aggregate accounting earnings of quoted Nigerian firms and (un)employment changes. This study examined the influence of selected macroeconomic variables on the relationship between aggregate earnings and (un)employment change. This study analyzes aggregated earnings of 101 quoted firms and (un)employment rate data from the year 2006 to 2017. Aggregated earnings yearly observations were used in this study, with each yearly observation equal to the cross-sectional sum of sample firms’ yearly earnings. Results show that corporate aggregate earnings growth is (negatively) positively and significantly associate with (un)employment changes. Selected macroeconomic indicators statistically and significantly influence the aggregate earnings growth association with (un)employment changes. Robustness of our analysis in this study allowed us to document in strong terms that in an emerging economy, corporate aggregate earnings significantly associated with (un)employment (i.e., as corporate earnings increases, more investment will be made, and job seekers will be employed thereby reducing the unemployment rate). One implication of our results is that aggregate accounting earnings contain information about (un)employment changes in Nigeria. Our results suggest that effective monetary policies aimed at reducing inflation and interest rate as well as enabling economic policies encouraging and efficient mobilizing of fund from surplus side to deficit side of the economy will reduce unemployment and lead to employment.

Aggregate earnings and gross domestic product: International evidence

ABSTRACTRecent studies in macro accounting suggest that changes in aggregate accounting earnings can predict quarterly GDP growth in the USA. Our objective in this study is to test the robustness of the association between aggregate earnings and real GDP growth across multiple countries and for different definitions of aggregate earnings. We test whether aggregate earnings changes predict future economic growth in eight countries – Australia, Canada, China, India, Japan, South Korea, the UK, and the USA. We find positive evidence regarding the generalisability of the aggregate earnings – real GDP relation in an international context. In additional tests, we find that economic forecasters appear to underreact to aggregate earnings information. Our results show that aggregate earnings lead economic growth and forecasts of real GDP growth can be improved by incorporating aggregate earnings information. Further, we also test if negative earnings changes contain more information than positive earnings changes and find only modest evidence in favour of this hypothesis. The results are robust to alternative statistical methodology and the removal of the USA data from the sample.

Withdrawn: Do Aggregate Earnings Components Predict GDP Growth Better? An International Setting Comparison

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.

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

We establish two channels for the flow of macroeconomic information from accounting earnings to the macroeconomy: a persistence channel via changes in accounting earnings before special items and a conservatism channel via recognition of special items. Prior studies using aggregate accounting earnings to forecast Gross Domestic Product (GDP) growth implicitly assumed only the former channel and have overlooked the substantial macroeconomic information content in the latter one. In this paper, we propose and find empirically that special items aggregate to dominate accounting earnings in forecasting and nowcasting GDP growth. We also find that professional macro forecasters incorporate information in earnings before special items in their forecasts and nowcasts but do not incorporate the information content of special items. This result is likely due to economic research discounting the information content of aggregate special items because National Income Product Accounts (NIPA) corporate profits are purged of special items. These findings provide an important step in understanding the distinct role of accounting for assessing future macroeconomic conditions.

The Usefulness of Negative Aggregate Earnings Changes in Predicting Future Gross Domestic Product Growth

Konchitchki and Patatoukas (2014) (hereafter KP 2014) 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 KP’s GDP growth forecast model on the sign of earnings changes. We show that negative changes in aggregate earnings predict future GDP growth up to three quarters ahead 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. In additional analyses we find evidence suggesting the incremental usefulness of negative earnings changes is driven by accounting conservatism rather than other drivers of asymmetric timeliness in earnings.

Conditional Conservatism of Aggregate Accounting Earnings

We examine whether or not conditional conservatism is observed at the aggregate level. Using both the Basu (1997) model and the Ball and Shivakumar (2006) models, we find some evidence consistent with conditional accounting conservatism at the aggregate level. Our results show that the interactive slope coefficient measuring the difference in sensitivity for aggregate accounting earnings is approximately three times as sensitive to negative returns as it is positive returns. Our results also demonstrate that the inclusion of macroeconomic indicators and discount rate variables to the conditional conservatism models improves model specification significantly. For example, when equal-weighted return is used as a gain or loss proxy the inclusion of macroeconomic indicators and discount rate proxies into the regression model increases the adjusted R 2 from 5% to 53%. Based on empirical evidence from this study we recommend that researchers who study the relation between aggregate accounting earnings and the fundamental characteristics of accounting information use both macroeconomic indicators and discount rate variables as explanatory variables in regression models.

Conditional Conservatism of Aggregate Accounting Earnings

We examine whether or not conditional conservatism is observed at the aggregate level. Using both the Basu (1997) model and the Ball and Shivakumar (2006) models, we find some evidence consistent with conditional accounting conservatism at the aggregate level. Our results show that the interactive slope coefficient measuring the difference in sensitivity for aggregate accounting earnings is approximately three times as sensitive to negative returns as it is positive returns. Our results also demonstrate that the inclusion of macroeconomic indicators and discount rate variables to the conditional conservatism models improves model specification significantly. For example, when equal-weighted return is used as a gain or loss proxy the inclusion of macroeconomic indicators and discount rate proxies into the regression model increases the adjusted R 2 from 5% to 53%. Based on empirical evidence from this study we recommend that researchers who study the relation between aggregate accounting earnings and the fundamental characteristics of accounting information use both macroeconomic indicators and discount rate variables as explanatory variables in regression models.

Aggregate Accounting Earnings and Security Returns: China Evidence and the Replication of US Results

Abstract This paper examines the earnings-return association over long return intervals. The research design is built upon one important accounting intuition: as earnings are aggregated over longer intervals, the effect of earnings measurement error and the time lag between earnings recognition and market reaction slowly dwindles. Therefore, over time, we should observe an improving association between (aggregate) earnings and stock return. In this study, we first replicate the results of Easton, Harris, and Ohlson (1992) for the same period of 1968-1986 and find very similar results under refined correlation metrics. Second, we expand coverage to test US data from 1962 to 2011 and find that their prediction holds for the past 50 years in the US market. Third, our post-1992 China and US data generate the same pattern of rising earnings-return correlation as the return interval expands, despite China’s immature stock market. Further comparison indicates that the earnings-return correlation in China is lower than that in the US market in the same period of 1992-2011. Finally, to make our results comparable to the original ones in Easton, Harris, and Ohlson (1992), we also report the 1992-2011 results under the original metrics, such as R2 and concordant pair percentage; we still reach the same conclusions. Overall, the empirical results support Easton, Harris, and Ohlson’s theory in both the US market and the emerging China market, extending the external validity of their theory to the international capital market.

Accounting earnings and gross domestic product

We document that aggregate accounting earnings growth is an incrementally significant leading indicator of growth in nominal Gross Domestic Product (GDP). Professional macro forecasters, however, do not fully incorporate the predictive content embedded in publicly available accounting earnings data. As a result, future nominal GDP growth forecast errors are predictable based on accounting earnings data that are available to professional macro forecasters in real time.

Detecting news in aggregate accounting earnings: implications for stock market valuation

How much news is there in aggregate accounting earnings? I provide evidence that earnings changes at the stock market level are correlated with new information about not only expected future cash flows but also discount rates. A comprehensive investigation of the link to discount rates reveals that aggregate earnings changes are tied to news about all components of the expected future stock market return, i.e., the real riskless rate, expected inflation, and the expected equity risk premium. Over the sample period studied, cash flow news and discount rate news in aggregate earnings changes covary positively and have offsetting impacts on stock market prices. As a result, stock market prices appear to be insensitive to aggregate earnings changes. The findings highlight the importance of separating cash flow news from discount rate news when evaluating the information content of accounting earnings at the stock market level. Overall, my study sheds new light on the informativeness and relevance of accounting earnings for valuation at the stock market level.

Accounting Earnings and Gross Domestic Product

We document that aggregate accounting earnings growth is an incrementally significant leading indicator of growth in nominal Gross Domestic Product (GDP). Professional macro forecasters, however, do not fully incorporate the predictive content embedded in publicly available accounting earnings data. As a result, future nominal GDP growth forecast errors are predictable based on accounting earnings data that are available to professional macro forecasters in real time.

Are Accounting Standards Diversifiable? Evidence of the Aggregate Valuation Effects of Standards

Prior accounting research documents that individual stock's returns respond to earnings differently under new accounting standards, regulations, or changes in enforcement. We take a macro perspective and study the properties of aggregate earnings, aggregate cash flows, aggregate returns on the market portfolio. First, we document that aggregate earnings and operating income have remained relatively stable after 1951, a period with changes in accounting standards and the only discernable patterns are from SFAS 142. Second, we document that the relation between market returns and aggregate earnings appears stable over long time periods. Third, we show that the relation between aggregate accounting earnings and GDP has remained stable over time as well. Finally, we show that common earnings attributes (such as asymmetric timeliness, asymmetric earnings persistence, and predictability of cash flows), while present in firm-level analyses, disappear in the aggregate. Overall, our results lend support to accounting standards having limited effect in the aggregate from a valuation perspective.