AbstractsEconomics

My thesis contributes to the research field related to the macroeconomic importance of accounting profitability at the aggregate-level. It is developed in three parts. The first part provides a review of the current research pertaining to the understanding of the relation among aggregate accounting numbers, capital markets and macroeconomy. Research on the information content of accounting numbers has been crucial for understanding accounting’s role, impact and power. The examined literature is narrow, but it has recently been expanding, unraveling valuable insights about the information content of aggregate accounting numbers to both capital market and macroeconomy. In the second part, I firstly examine the aggregate accounting profitability’s relation with market returns under the hypothesis of structural instability across diverse monetary policy environments. Secondly, I investigate the monetary linkage between aggregate accounting profitability changes and inflation. The first hypothesis is validated through the finding of a statistically significant relation between market returns and profitability’s interaction with monetary policy settings. My second task is to investigate the impact of aggregate profitability changes on monetary-policy-stance measures in order to explain the relation between aggregate profitability changes and inflation growth. Through the second task, I extend previous literature’s evidence of a strong relation between aggregate earnings changes and the three components of expected stock market returns (i.e., real riskless rate, expected inflation, and expected equity risk premium). In the second section of this thesis’ part, I examine simultaneously the causal relations among aggregate profitability changes, monetary policy changes and inflation growth using vector autoregressive (VAR) models. The empirical results document that the relation between aggregate profitability changes and inflation growth is the result of a positive relation between aggregate profitability and monetary policy changes represented either by effective federal funds rate, federal funds premium, or real federal funds rate. In the third part, I examine whether aggregate accounting profitability changes can predict future cumulative and marginal changes in real output. Using simple univariate and multivariate predictive regressions, I conclude that both the systematic component of aggregate accounting profitability changes and total profitability changes exhibit a leading behavior only for very long (twelve quarter) periods ahead. Nevertheless, for the previous forecasting periods my results indicate that the predictive ability of aggregate profitability derives from the impact of the existing leading indicators. In addition, I examine the predictive ability of aggregate profitability changes in the prediction of turning points. I decompose profitability changes into leading-related and coincident-related components and I find evidence of aggregate accounting profitability changes being mainly a coincident-related…