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Behavioral Biases in Firms' Growth Expectations

Maiko Koga and Haruko Kato
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Maiko Koga: Bank of Japan
Haruko Kato: Bank of Japan

No 17-E-9, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper provides evidence that firms exhibit behavioral biases in their growth expectations. Using firm-level survey data, we document that optimism and pessimism biases are generated by the business cycle, financial market conditions, and firm-specific factors including firms' past experiences. We also demonstrate that biases affect the real business decisions of firms. Firms' fixed investment and R&D spending are raised by optimism and hampered by pessimism. The above findings imply that behavioral biases generated by the firms can be an alternative mechanism on how macroeconomic and financial conditions affect their investment behavior in addition to the traditional optimization mechanism.

Keywords: Behavioral bias; Expectation; Firm; Investment; Optimism bias; Pessimism bias; Survey data (search for similar items in EconPapers)
JEL-codes: D84 E03 E22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-sbm and nep-tid
Date: 2017-07-21
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