The Effect of Disaggregate Information on the Expectation Formation of Firms

Lukas Buchheim and Sebastian Link

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: This paper studies a new aspect of firms’ expectation formation by asking whether expectations primarily reflect aggregate, industry-wide information (e.g., industry trends) or disaggregate information (e.g., firm-specific information). First, we show that disaggregate information is strongly associated with expectations even when controlling for aggregate information at high-dimensional industry levels. Moreover, aggregate and disaggregate information explain comparable shares of the variance in expectations. Second, we exploit a natural experiment to identify the causal effect of new information on expectations. The predictable demand effects for durable goods due to the German VAT increase of 2007 implied that, at the time, durable goods retailers had access to more reliable information about their future demand than non-durable goods retailers. Utilizing this observation in a difference-in-differences design, we find that “treated” firms were significantly more forward-looking ahead of the VAT-induced demand shifts. Overall, our results suggest that firms rationally incorporate disagreggate information into their expectations.

Keywords: Expectation Formation; Firm Behavior; Survey Data; Natural Experiments in Macroeconomics; Heterogeneity in Expectations (search for similar items in EconPapers)
JEL-codes: D22 D84 E20 E32 E65 (search for similar items in EconPapers)
Date: 2017-11-09
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Working Paper: The Effect of Disaggregate Information on the Expectation Formation of Firms (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:41214

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