Jose M. Carabias

The Real-Time Information Content of Macroeconomic News: Implications for Firm-Level Earnings Expectations

This paper investigates the usefulness of the real-time macroeconomic news-flow as a leading indicator of firm-level end-of-quarter realized earnings. Using recent advances in macroeconomics, I develop a nowcasting model for quarterly earnings and provide two main findings. First, I show that my model provides out-of-sample expectations that are as accurate as analysts’ forecasts. Second, macroeconomic news embedded in my nowcasts is not fully incorporated into investors’ earnings expectations and predicts future abnormal returns around earnings announcements. These findings have three main implications for capital markets research. First, real-time macroeconomic news can be used to update earnings expectations in real-time. Second, there are economic benefits of doing so, as evidenced by the magnitude of risk-adjusted returns around earnings announcements. Third, after three decades of almost nonexistent research on time-series models for quarterly earnings, the door is open again for fruitful research in this area.

From Accounting to Economics: The Role of Aggregate Special Items in Gauging the State of the Economy

We establish two channels for the flow of macroeconomic information from accounting earnings to the macroeconomy: a persistence channel via changes in accounting earnings before special items and a conservatism channel via recognition of special items. Prior studies using aggregate accounting earnings to forecast Gross Domestic Product (GDP) growth implicitly assumed only the former channel and have overlooked the substantial macroeconomic information content in the latter one. In this paper, we propose and find empirically that special items aggregate to dominate accounting earnings in forecasting and nowcasting GDP growth. We also find that professional macro forecasters incorporate information in earnings before special items in their forecasts and nowcasts but do not incorporate the information content of special items. This result is likely due to economic research discounting the information content of aggregate special items because National Income Product Accounts (NIPA) corporate profits are purged of special items. These findings provide an important step in understanding the distinct role of accounting for assessing future macroeconomic conditions.

Downside Risk, Capital Flexibility and Operating Leases

In this paper, I investigate whether firms’ risk-hedging incentives affect their choices between owned and rented capital (operating leases). In recessions, firms facing negative demand shocks are loaded with unproductive capital. Absent of any trading frictions, firms can trade their assets to adjust their capacity in response to these shocks. However, due to costly reversibility of capital, firms might lack the flexibility to cut capital and deviate from their optimal investment. I find that the proportion of operating leased assets is positively correlated with downside risk. Furthermore, the relationship between operating leases and downside risk strengthens with firms’ inflexibility and the overall leverage in the industry. Finally, I show that contrary to conventional wisdom, by using operating leases, firms are able to reduce their risk exposure and expected return. My findings suggest that firms might be unwilling to retain the economic ownership of assets when, after an aggregate demand shock, the likelihood of being loaded with unproductive capital is high. As such, operating lease contracts might serve as risk-hedging mechanisms through which lessees transfer some of their operating risk to the lessor. These results suggest that, to some extent, companies use (and equity investors value) operating leases consistently with the economic interpretation underlying the “ownership approach” towards lease classification.