Firms’ response to macroeconomic estimation errors

Journal Article (Journal Article)

Initial Gross Domestic Product (GDP) announcements are important economic signals that convey information on the state of the economy but contain substantial estimation error. We investigate how GDP estimation errors affect firms' real decisions and profitability. We find that GDP estimation errors are positively associated with one-quarter-ahead changes in firms’ capital investments, production, inventory, and profitability. However, we observe long-run profitability reversals, which is consistent with initial over (under) production eventually being met with declines (increases) in future profitability. Furthermore, managerial responses to the estimation errors mimic the response to the true component of the GDP signal, suggesting that managers do not filter estimation errors and overreact to both GDP signal components. Our firm-level findings translate to the macroeconomic level, where we find that a long-run reversal follows a positive short-run aggregate investment response to GDP signal components.

Full Text

Duke Authors

Cited Authors

  • Binz, O; Mayew, WJ; Nallareddy, S

Published Date

  • April 1, 2022

Published In

Volume / Issue

  • 73 / 2-3

International Standard Serial Number (ISSN)

  • 0165-4101

Digital Object Identifier (DOI)

  • 10.1016/j.jacceco.2021.101454

Citation Source

  • Scopus