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Tilting the evidence: the role of firm-level earnings attributes in the relation between aggregated earnings and gross domestic product

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  • Ryan T. Ball

    (University of Michigan)

  • Lindsey Gallo

    (University of Michigan)

  • Eric Ghysels

    (University of North Carolina at Chapel Hill)

Abstract

We examine whether the contribution of firm-level accounting earnings to the informativeness of the aggregate is tilted towards earnings with specific financial reporting characteristics. Specifically, we investigate whether considering the smoothness of firm-level earnings increases the informativeness of aggregate earnings for future real GDP, and if so, whether macroeconomic forecasters use this information efficiently. Using recently-developed mixed data sampling methods, we find that the aggregate is tilted towards firms with smoother earnings and that this composition of aggregate earnings outperforms traditional weighting schemes. Further, this tilted aggregate has a stronger positive association with forecast revisions; in fact, analysts who utilize earnings the most in their forecasts appear to fully impound the informativeness of earnings smoothness. Our results synthesize and span parallel yet distinct streams of research on the role of accounting earnings in firm-level and macroeconomic outcomes and suggest an important role for financial reporting characteristics in the aggregate.

Suggested Citation

  • Ryan T. Ball & Lindsey Gallo & Eric Ghysels, 2019. "Tilting the evidence: the role of firm-level earnings attributes in the relation between aggregated earnings and gross domestic product," Review of Accounting Studies, Springer, vol. 24(2), pages 570-592, June.
    • Handle: RePEc:spr:reaccs:v:24:y:2019:i:2:d:10.1007_s11142-019-09493-0
    DOI: 10.1007/s11142-019-09493-0
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    References listed on IDEAS

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    Cited by:

    1. Ryan T. Ball & Jonathan Bonham & Thomas Hemmer, 2020. "Does it pay to ‘Be Like Mike’? Aspiratonal peer firms and relative performance evaluation," Review of Accounting Studies, Springer, vol. 25(4), pages 1507-1541, December.

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    More about this item

    Keywords

    Gross domestic product; Aggregated earnings; Tilt; Mixed data sampling;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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