Research

This study provides the first empirical evidence that the Federal Reserve (the Fed) systematically retrieves micro-level accounting reports to aid its understanding of the state of the macroeconomy. Using unique data identifying its direct access of corporate SEC filings, we show that the Fed tracks firms that are bellwethers and industry leaders, or that can engender systemic risk. The qualitative information in the Fed-accessed periodic reports explains the Fed’s GDP growth forecasts for up to four quarters, after controlling for contemporaneous aggregate earnings and other economic information. However, professional forecasts fail to incorporate such qualitative accounting information. In addition, this qualitative information is reflected in the tone of the ensuing FOMC meeting discussions as well as in Fed forecasts of key macro demand and supply factors. Overall, our evidence suggests important externalities of micro-level accounting reports, especially qualitative disclosures, on the central bank’s macroeconomic forecasts and, by extension, monetary policy.Data Availability: Data are available from public sources.

This study examines whether a simple measure of internet search intensity for publicly traded retail firms can enhance the capital market’s firm-level revenue expectations and provide insights into economy-wide retail sales. At the firm level, the search index is predictive of analyst nowcast and forecast errors after controlling for past sales, deferred revenue, firm characteristics, and firm and time fixed effects. An implementable trading strategy generates abnormal returns of roughly 2% to 3% from the fiscal quarter end through the earnings announcement, well above transaction costs. We also find that approximately two-thirds of the abnormal returns occur around earnings announcements, with an even greater fraction for firms with coarser information environments. At the macro level, we find that the permanent, seasonal, and transitory components of our search intensity index align with those of the Census Bureau’s retail sales data and U.S. real GDP, suggesting our measure is a leading indicator of personal consumption expenditures, a key driver of aggregate output. The aggregated search index nowcasts aggregated publicly traded retail firm sales both within and out-of-sample after controlling for past sales.

Recent literature documents that the time structure of information arrival through earnings announcements has important implications for asset prices. We show that one possible reason for this relation is the interaction between the time structure of information release by firms and macro information acquisition by investors. We document that investors acquire relatively more macro information during earnings clusters—days when many firms announce earnings contemporaneously—relative to non-cluster days. We further show that on these days, investors trade to adjust their exposure to the macroeconomy, and aggregate uncertainty declines. Finally, evidence indicates that our findings arise from two mechanisms: earnings clusters serving as conduits of macro information that trigger investors’ attention toward the macroeconomy, and earnings clusters straining investors’ attention capacity, thus inducing a reallocation of attention from firm-specific to aggregate information.

Central banks have increased public disclosures of their private information regarding the economy’s current and future state over time. While previous research focuses on the benefits of this increase in transparency, we provide an analytical framework and empirical evidence for potential unintended costs. We find that central bank economic transparency (CBET) causes managers to rely less on stock price when making investment decisions. This is consistent with central bank disclosures shifting investors’ information collection and pricing from the aggregate-level component of cash flows (where managers do not have an information advantage) to the firm-level component (where managers do have an information advantage). The results are pronounced when the firm does not provide guidance and when noise trading in the firm’s stock is low. Further, we show that investors shift their search efforts from aggregate-level towards firm-level information, and that investment efficiency of more exposed firms’ falls relative to that of less exposed firms. The results are robust to using the Bank of England’s Inflation Report amendments as a shock to CBET.

We show that the unobserved components model (UCM) with look-ahead wisdom effectively models EPS’s permanent, cyclical, and transitory components. Using this decomposition, we find that the intertemporal volatility of EPS is influenced by the least studied—the cyclical component—which contributes substantially to explaining stock return variation. However, what GAAP disaggregation rules view as non-recurring is commingled with the cyclical component, which has different valuation effects than one-time charges. Questioning the traditional perspective of viewing them as purely transitory, we find that negative special items are leading indicators of the cyclical component of earnings. Managers attempt to overcome the limits of GAAP disaggregation rules by reflecting cyclical profits in qualitative disclosures. Finally, we show that UCM components estimated without look-ahead wisdom explain stock return variations over and above shocks to core and non-core earnings per equity analysts, suggesting a broader role for this methodology in financial analysis and valuation

I show that, consistent with theory, the volume of business transactions increases during good economic states relative to bad (Veldkamp 2005). As more transactions are aggregated in financial reports, the precision of the macroeconomic signal in aggregated accounting information increases, so that accounting reports contain more precise macroeconomic information during good states of the economy when transaction volume is high than bad states when the volume is low (Van Nieuwerburgh and Veldkamp 2006). Lastly, the macroeconomic information dynamics of aggregate earnings follow economic theory: macro content grows throughout good states as agents become more confident and the information environment improves.

Utilizing a novel survey dataset from Central America, we examine the determinants and the real effects of adopting accounting practices by microenterprises with different levels of engagement in the formal economy. Although most formal firms adopt accounting systems due to the demands of business formalization, they tend to choose a higher quality system when they rely on their own capital and engage in formal business practices with customers and suppliers. Surprisingly, despite the lack of any mandate, 36% (52%) of informal (sub-formal) firms voluntarily adopt a formal accounting system, with 6% (17%) choosing a higher quality system. Both these decisions are influenced by access to external capital, reliance on personal funds for investment, extension of credit to customers, marketing promotions, as well as the entrepreneurs’ personal motivations and socioeconomic traits. In terms of real effects, high-quality accounting systems are associated with higher sales revenue, business expansion plans, the provision of employee incentives, and enhanced access to bank loans, highlighting both the managerial and financing roles of accounting. Despite the absence of mandates, our evidence shows that even informal microenterprises recognize the value of robust accounting practices. Our study underscores the importance of tailored public policy programs on enabling accounting services in microenterprises, thereby supporting business productivity, financial inclusion, and economic growth in developing economies.