The Informativeness of Micro and Macro Information During Economic Crisis and Non-Crisis Periods: Evidence from Europe

We investigate whether and how the information content of reported profitability and macroeconomic expectations changes when the state of the economy changes from non-crisis to crisis conditions. For this, we analyze data from 16 European countries over the period 2005–2015. We find macroeconomic expectations to be useful in predicting future profitability only during non-crisis periods and mainly for firms facing elastic demand for their products and services and firms without sequential losses. Current profitability as well as its cash flow and accruals components are much more informative predictors of future profitability than macroeconomic expectations in both non-crisis and crisis periods. Market pricing tests suggest that macroeconomic expectations are not informative and thus not priced by market participants during crisis periods and support efficient pricing of current profitability under both non-crisis and crisis periods. However, it is the cash flow component of profitability that is efficiently priced under both economic conditions, while the accrual component of profitability is mispriced during crisis periods. Overall, we provide evidence that reported accounting information is much more useful to stock market investors than macroeconomic expectations in both non-crisis and crisis economic periods.