Aggregate earnings surprises, monetary policy, and stock returns

• Published in: Journal of accounting & economics Vol. 62; no. 1; pp. 103 - 120
• Main Authors: Gallo, Lindsey A., Hann, Rebecca N., Li, Congcong
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.08.2016; Elsevier Sequoia S.A
• Subjects: Aggregate earnings; Earnings; Federal funds futures; Federal funds rate; Federal Reserve monetary policy; Monetary policy; Rates of return; Securities markets; Stock returns; Studies; United States; United States > US; E52; E44; Monetary policy; Aggregate earnings; Stock returns; M41; Federal funds futures
• ISSN: 0165-4101; 1879-1980
• DOI: 10.1016/j.jacceco.2016.04.003

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 contain monetary policy news.•The monetary policy news in aggregate earnings drives the negative aggregate earnings-returns association.•The effect of monetary policy news is more pronounced when monetary policy surprise is negative.•The market does not fully anticipate the monetary policy news in aggregate earnings.