Macroeconomic consequences of accounting : the effect of accounting conservatism on macroeconomic indicators and the money supply
This study investigates the macroeconomic consequences of firm-level accounting conservatism. Consistent with conditional conservatism extending to the aggregate level, I demonstrate that annual estimates of aggregate corporate profits and gross domestic product from 1929 to 2007 compiled by the U.S. Bureau of Economic Analysis are more sensitive to negative aggregate cash flow news than to positive aggregate cash flow news. Next, I estimate the dollar value impact of firm-level accounting conservatism on measurements of macroeconomic fundamentals. Finally, I show that the federal funds rate set by the U.S. Federal Reserve tends to be lower when the dollar value impact of firm-level accounting conservatism on gross domestic product measurements is larger. These results suggest that accounting can impact social welfare by altering the measurement attributes of key macroeconomic indicators and shaping monetary policy decisions which regulate the money supply and alter macroeconomic growth.