The Accounting Rate of Return and Economic Growth

Abstract

The fundamental theorem of accounting (FTA) (Fellingham and Lin (2020) and Fellingham, Lin and Schroeder (2022)) states that, under some realistic assumptions, the accounting rate of return on assets is equal to information. Ross and Ziebart (2023) show several empirical implications of the fundamental theorem of accounting regarding the meaningfulness of the accounting rate of return to market participants. The implications collectively provide evidence that accounting rates of return are the more meaningful information source to market participants than stock market rates of return. These findings motivate this study which uses quarterly data and finds that current aggregate U.S. accounting rates of return can explain current and predict future GDP growth rates of the U.S. economy. (E02, D44, G10, G17, M41)