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Aggregate earnings and why they matter

aUniversity of Chicago, Booth School of Business, United States
bUniversity of Texas at Dallas, United States

Journal of Accounting Literature

ISSN: 0737-4607

Article publication date: 2 February 2015

Issue publication date: 28 February 2015

81

Abstract

The accounting literature has traditionally focused on firm-level studies to examine the capital market implications of earnings and other accounting variables. We first develop the arguments for studying capital market implications at the aggregate level as well. A central issue is that diversification makes equity investors at least partially and potentially almost completely immune to several firm-level properties of earnings by holding diversified portfolios. Diversification is particularly important when assessing the welfare consequences of random errors in accounting measurement (imperfect accruals) and, to the extent it is independent across firms, of deliberate manipulation (earnings management). Consequently, some firm-level metrics of association, timeliness, value relevance, conservatism and other earnings properties do not map easily into investor welfare. Similarly, earnings-related risk manifests itself to equity investors largely through systematic earnings risk (covariation with aggregate earnings and/or other macroeconomic indicators). We conclude that the design and evaluation of financial reporting must adopt at least in part an aggregate perspective. We then summarize the literature in accounting, economics and finance on aggregate earnings and stock prices. Our review highlights the importance of studying earnings at the aggregate level.

Keywords

Citation

Ball, R. and Sadka, G. (2015), "Aggregate earnings and why they matter", Journal of Accounting Literature, Vol. 34 No. 1, pp. 39-57. https://doi.org/10.1016/j.acclit.2015.01.001

Publisher

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Emerald Publishing Limited

Copyright © 2015, Emerald Publishing Limited

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