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

Ahmed M. Abdalla, Jose M. Carabias

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We propose and find that aggregate special items conveys more information about future real GDP growth than aggregate earnings before special items because the former contains advance news about future economic outcomes. A two-stage rational expectations test reveals that professional forecasters fully understand the information content of aggregate earnings before special items but underestimate that of aggregate special items when revising their GDP forecasts. Using vector autoregressions, we show that aggregate earnings before special items has predictive ability for GDP because, as suggested by previous literature, it acts as a proxy for corporate profits included in national income. In contrast, aggregate special items captures changes in the behavior of economic agents on a timely basis, which in turn have real effects on firms' investment and hiring, as well as consumers' wealth and spending. Consistent with news-driven business cycles, we find that aggregate special items produces synchronized movements across macroeconomic aggregates.
Original languageEnglish
Number of pages52
JournalThe Accounting Review
DOIs
Publication statusAccepted/In press - 2021

Keywords

  • Aggregate Earnings
  • Aggregate Special Items
  • GDP Growth
  • Asymmetric Timeliness
  • Rational Expectations
  • News-driven Business Cycles

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