This paper examines whether the negative association between aggregate earnings and returns is explained by the monetary policy news in aggregate earnings. Using Federal funds futures data to construct a measure of policy news, we find that aggregate earnings convey information about the Fed׳s policy actions. Additionally, the negative aggregate earnings-returns association is muted when we control for policy surprises. This result is more pronounced in periods with negative policy surprises, which tend to trigger a more significant market reaction. Taken together, these results suggest that aggregate earnings convey policy news and the market reacts negatively to policy surprises, which drives the negative aggregate earnings-returns association.
Aggregate earnings, Monetary policy, Stock returns, Federal funds futures
Accounting | Corporate Finance
Financial Intermediation and Information
Journal of Accounting and Economics
GALLAO, Lindsey A.; HANN, Rebecca N.; and Congcong LI.
Aggregate earnings surprises, monetary policy, and stock returns. (2016). Journal of Accounting and Economics. 62, (1), 103-120. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/1513
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