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

Cheng Chen (), Tatsuro Senga (), Chang Sun and Hongyong Zhang
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Chang Sun: University of Hong Kong
Hongyong Zhang: Research Institute of Economy, Trade and Industry (RIETI)

No 838, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: How do real-time expectations affect firms’ economic decisions? We provide evidence by using a dataset on Japanese multinational firms’ sales forecasts and exploring an unexpected escalation of a territorial dispute between China and Japan in 2012. Our estimation substantiates that, after the escalation of the dispute, affiliates of Japanese multinational firms in China experienced a sharp but temporary decline in total sales relative to affiliates in other countries and a more persistent decline in investment. Moreover, the territorial dispute has led to persistent pessimism in these firms’ expectations about future sales, which can explain 60% of the overall decline in investment.

Keywords: forecasts; pessimistic expectations; geopolitical events; investment (search for similar items in EconPapers)
JEL-codes: E22 E32 D84 F51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cna and nep-mac
Date: 2017-10-14
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