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

Prior accounting research documents that individual stock's returns respond to earnings differently under new accounting standards, regulations, or changes in enforcement. We take a macro perspective and study the properties of aggregate earnings, aggregate cash flows, aggregate returns on the market portfolio. First, we document that aggregate earnings and operating income have remained relatively stable after 1951, a period with changes in accounting standards and the only discernable patterns are from SFAS 142. Second, we document that the relation between market returns and aggregate earnings appears stable over long time periods. Third, we show that the relation between aggregate accounting earnings and GDP 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. Overall, our results lend support to accounting standards having limited effect in the aggregate from a valuation perspective.