This study examines the incremental predictive power of aggregate measures of financial misreporting for recession and real GDP growth. We draw on prior research suggesting that misreporting has real economic effects because it represents misinformation on which firms base their investment, hiring and production decisions. We find that aggregate M-Score incrementally predicts recessions at forecast horizons of five to eight quarters ahead. We also find that aggregate M-Score is significantly associated with lower future growth in real GDP, real investment, consumption, and industrial production. Additionally, our result that aggregate M-Score predicts lower real investment one to four quarters ahead partially accounts for why misreporting predicts recessions five to eight quarters ahead. Our findings are weaker when we use aggregate F-Score as a proxy for misreporting. Overall, this study provides novel evidence that aggregate misreporting measures can aid forecasters and regulators in predicting recessions and real GDP growth.
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Research Article|
December 01 2022
Aggregate Financial Misreporting and the Predictability of U.S. Recessions and GDP Growth
Messod D. Beneish;
Messod D. Beneish
Kelley School of Business, Indiana University
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David B. Farber
;
David B. Farber
Indiana University Kelley School of Business Indianapolis
Associate Professor
801 W. Michigan St.
UNITED STATES
Indianapolis
Indiana
46202
915-244-4990
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Matthew Glendening;
Matthew Glendening
UNITED STATES
Trulaske College of Business, University of Missouri
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Kenneth W. Shaw
Kenneth W. Shaw
UNITED STATES
Trulaske College of Business, University of Missouri
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Received:
March 05 2021
Revision Received:
May 21 2022
Revision Received:
November 01 2022
Revision Received:
November 18 2022
Accepted:
November 28 2022
Online Issn: 1558-7967
Print Issn: 0001-4826
2022
The Accounting Review (2022)
Citation
Messod D. Beneish, David B. Farber, Matthew Glendening, Kenneth W. Shaw; Aggregate Financial Misreporting and the Predictability of U.S. Recessions and GDP Growth. The Accounting Review 2022; https://doi.org/10.2308/TAR-2021-0160
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