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Survey Evidence on the Rationality of Business Expectations: Implications from the Malaysian Agricultural Sector

  • Wong, Shirly Siew-Ling
  • Puah, Chin-Hong
  • Shazali, Abu Mansor

The rational expectations hypothesis (REH) serves as an appealing mechanism in forming expectations compared to that of extrapolative or adaptive frameworks because of its consistency with the basic principles of maximizing behavior. This argument is particularly true as the basic idea of REH maintains that expectations in an uncertain world are formed under assumptions where no systematic errors and information are fully utilized. However, empirical findings from the present study showed diverse evidence of rationality in business operational forecasts formed by Malaysian agriculture firms, as capital expenditure expectations were found to be irrational but gross revenue expectations were supportive of the REH proposition. This implies that the survey of business forecasts may not work well in reflecting the true business outlook, specifically in value-related operational forecasts, which in turn would directly influence investment decisions as well as the capital budgeting process.

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File URL: https://mpra.ub.uni-muenchen.de/36661/1/MPRA_paper_36661.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36661.

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Date of creation: Dec 2011
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Publication status: Published in Economic Computation and Economic Cybernetics Studies and Research 4.45(2011): pp. 169-180
Handle: RePEc:pra:mprapa:36661
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  1. Kathryn M. Dominguez, 1986. "Are foreign exchange forecasts rational? New evidence from survey data," International Finance Discussion Papers 281, Board of Governors of the Federal Reserve System (U.S.).
  2. Fischer, Andreas M, 1989. "Unit Roots and Survey Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(4), pages 451-63, November.
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  4. Mullineaux, Donald J, 1978. "On Testing for Rationality: Another Look at the Livingston Price Expectations Data," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 329-36, April.
  5. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
  6. Aggarwal, Raj & Mohanty, Sunil & Song, Frank, 1995. "Are Survey Forecasts of Macroeconomic Variables Rational?," The Journal of Business, University of Chicago Press, vol. 68(1), pages 99-119, January.
  7. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
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  11. Evans, George & Gulamani, Riyaz, 1984. "Tests for Rationality of the Carlson-Parkin Inflation Expectations Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 46(1), pages 1-19, February.
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  13. Levine, David I, 1993. "Do Corporate Executives Have Rational Expectations?," The Journal of Business, University of Chicago Press, vol. 66(2), pages 271-93, April.
  14. Benjamin M. Friedman, 1980. "Survey Evidence on The Rationality of Interest Rate Expectations," NBER Working Papers 0261, National Bureau of Economic Research, Inc.
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  16. Forsells, Magnus & Kenny, Geoff, 2002. "The rationality of consumers' inflation expectations: survey-based evidence for the euro area," Working Paper Series 0163, European Central Bank.
  17. William P. Osterberg, 2000. "New results on the rationality of survey measures of exchange-rate expectations," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 14-21.
  18. E. Douglas Beach & Jorge Fernandez-Cornej & Noel D. Uri, 1995. "Testing the rational expectations hypothesis using survey data from vegetable growers in the USA," Journal of Economic Studies, Emerald Group Publishing, vol. 22(6), pages 46-59, October.
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