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From accounting to economics: the role of aggregate special items in gauging the state of the economy

Abdalla, Ahmed Mahmoud Ahmed and Carabias, Jose M. (2017) From accounting to economics: the role of aggregate special items in gauging the state of the economy. .

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Identification Number: 10.2139/ssrn.2871600

Abstract

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.

Item Type: Monograph (Working Paper)
Additional Information: © 2017 The Author
Divisions: Accounting
Subjects: H Social Sciences > HG Finance
JEL classification: E - Macroeconomics and Monetary Economics > E0 - General > E01 - Measurement and Data on National Income and Product Accounts and Wealth
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E60 - General
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Date Deposited: 18 Sep 2019 15:06
Last Modified: 28 Sep 2019 23:27
URI: http://eprints.lse.ac.uk/id/eprint/101662

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