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Firm Expectations and Investment: Evidence from the China-Japan Island Dispute

Cheng Chen, Tatsuro Senga, Chang Sun and Hongyong Zhang

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: 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.

Pages: 24 pages
Date: 2016-09
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Citations: View citations in EconPapers (3)

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Working Paper: Firm Expectations and Investment: Evidence from the China-Japan Island Dispute (2017) Downloads
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