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Firm optimism and pessimism

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  • Bachmann, Rüdiger
  • Elstner, Steffen

Abstract

This paper explores the question of whether firms have systematic expectation biases. Using microdata from the West German manufacturing subset of the IFO Business Climate Survey, we infer quarterly production growth rates at the firm level. We then combine this information with production growth expectations over a quarterly horizon to construct quantitative firm-specific expectation errors. Our findings show that at most one-third of our firms systematically over- or underpredict their production growth one-quarter ahead. Our findings further show that larger and exporting firms tend to have more realistic expectations, while firms with higher leverage are more prone to expectations that are biased towards optimism.

Suggested Citation

  • Bachmann, Rüdiger & Elstner, Steffen, 2015. "Firm optimism and pessimism," European Economic Review, Elsevier, vol. 79(C), pages 297-325.
  • Handle: RePEc:eee:eecrev:v:79:y:2015:i:c:p:297-325
    DOI: 10.1016/j.euroecorev.2015.07.017
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    Cited by:

    1. Maiko Koga & Haruko Kato, 2017. "Behavioral Biases in Firms' Growth Expectations," Bank of Japan Working Paper Series 17-E-9, Bank of Japan.
    2. Altig, David E. & Barrero, Jose Maria & Bloom, Nicholas & Davis, Steven J. & Meyer, Brent & Parker, Nicholas B., 2019. "Surveying Business Uncertainty," FRB Atlanta Working Paper 2019-13, Federal Reserve Bank of Atlanta, revised 01 Jul 2019.
    3. repec:aea:aecrev:v:109:y:2019:i:7:p:2531-67 is not listed on IDEAS
    4. Poutineau, Jean-Christophe & Vermandel, Gauthier, 2015. "Cross-border banking flows spillovers in the Eurozone: Evidence from an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 378-403.
    5. Olivier Coibion & Yuriy Gorodnichenko & Tiziano Ropele, 2018. "Inflation Expectations and Firm Decisions: New Causal Evidence," NBER Working Papers 25412, National Bureau of Economic Research, Inc.
    6. Charles F. Manski, 2018. "Survey Measurement of Probabilistic Macroeconomic Expectations: Progress and Promise," NBER Macroeconomics Annual, University of Chicago Press, vol. 32(1), pages 411-471.
    7. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37/2017, Bank of Finland.
    8. repec:eee:moneco:v:101:y:2019:i:c:p:82-99 is not listed on IDEAS
    9. Bachmann, Rüdiger & Born, Benjamin & Elstner, Steffen & Grimme, Christian, 2013. "Time-varying business volatility, price setting, and the real effects of monetary policy," Working Papers 01/2013, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    10. Joel M. David & Venky Venkateswaran, 2019. "The Sources of Capital Misallocation," American Economic Review, American Economic Association, vol. 109(7), pages 2531-2567, July.
    11. repec:eee:jeborg:v:145:y:2018:i:c:p:66-79 is not listed on IDEAS
    12. Massenot, Baptiste & Pettinicchi, Yuri, 2018. "Can firms see into the future? Survey evidence from Germany," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 66-79.
    13. Pinto, Santiago & Sarte, Pierre-Daniel G. & Sharp, Robert, 2015. "Learning About Consumer Uncertainty from Qualitative Surveys: As Uncertain As Ever," Working Paper 15-9, Federal Reserve Bank of Richmond.
    14. Zeno Enders & Franziska Hünnekes & Gernot Müller, 2019. "Firm expectations and economic activity," CESifo Working Paper Series 7623, CESifo Group Munich.
    15. repec:eee:jmacro:v:60:y:2019:i:c:p:163-179 is not listed on IDEAS
    16. Jarko Fidrmuc & Christa Hainz & Werner Hölzl, 2018. "Individual Credit Market Experience and Perception of Aggregate Bank Lending. Evidence from a Firm Survey," WIFO Working Papers 574, WIFO.
    17. Bofinger, Peter & Schnabel, Isabel & Feld, Lars P. & Schmidt, Christoph M. & Wieland, Volker, 2015. "Zukunftsfähigkeit in den Mittelpunkt. Jahresgutachten 2015/16," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201516.
    18. Adriana Grasso & Tiziano Ropele, 2018. "Firms’ inflation expectations and investment plans," Temi di discussione (Economic working papers) 1203, Bank of Italy, Economic Research and International Relations Area.
    19. Yoshiyuki Nakazono & Maiko Koga & Tomohiro Sugo, 2018. "Private Information and Analyst Coverage: Evidence from Firm Survey Data," Bank of Japan Working Paper Series 18-E-17, Bank of Japan.
    20. Lance Kent, 2015. "Relaxing Rational Expectations," Working Papers 159, Department of Economics, College of William and Mary.
    21. Anja Kukuvec & Harald Oberhofer, 2018. "The propagation of business sentiment within the European Union," Department of Economics Working Papers wuwp257, Vienna University of Economics and Business, Department of Economics.
    22. Manuel Buchholz & Lena Tonzer & J. Berner, 2016. "Asymmetric Investment Responses to Firm-specific Uncertainty," IWH Discussion Papers 7, Halle Institute for Economic Research.
    23. repec:zbw:iwhdps:7-16 is not listed on IDEAS
    24. Buchholz, Manuel & Tonzer, Lena & Berner, Julian, 2016. "Asymmetric Investment Responses to Firm-specific Uncertainty," IWH Discussion Papers 7/2016, Halle Institute for Economic Research (IWH).

    More about this item

    Keywords

    Survey data; Expectation errors; Expectation biases; Firm data;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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