Are Accounting Standards Diversifiable? Evidence of the Aggregate Valuation Effects of Standards

Prior research documents that individual stock returns respond to earnings differently under new accounting standards, regulations, or changes in enforcement. This paper examines whether this result extends to the aggregate stock market. We take a macro perspective and study the properties of aggregate earnings. First, we document that aggregate earnings and operating income have remained relatively stable after 1951, notwithstanding numerous changes in accounting standards. Second, we document that the relation between aggregate stock market returns and aggregate earnings also appears stable over long time periods. Third, we show that the relation between aggregate earnings, GDP and industrial production has remained stable over time as well. Finally, we show that common earnings attributes (such as asymmetric timeliness, asymmetric earnings persistence, and predictability of cash flows), while present in firm-level analyses, disappear in the aggregate.