|Author Name||CHEN Cheng (University of Hong Kong) / SENGA Tatsuro (Queen Mary University of London) / SUN Chang (Princeton University) / ZHANG Hongyong (Fellow, RIETI)|
|Creation Date/NO.||September 2016 16-E-090|
|Research Project||RIETI Data Management Project|
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First draft: September 2016
How do firm expectations affect their economic decisions? We provide evidence using a novel dataset on Japanese multinational firms' sales forecasts and exploring an unexpected escalation of a territorial dispute between China and Japan in 2012. The empirical analysis shows that after the escalation of the dispute, affiliates of Japanese multinational firms in China experienced a protracted decline in sales and investment, which had not recovered until the end of this study (2015Q1). We further document a similar drop in firms' sales forecasts and that firms under-predicted sales in 2013 and 2014. Finally, we estimate the effect of firm expectations on investment, and a back-of-envelope calculation shows that the under-forecasting of sales can explain 20 to 60 percent of the decline in investment.