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School of Economics and Finance

No. 838: Firm Expectations and Investment: Evidence from the China-Japan Island Dispute

Cheng Chen , Department of Statistics, London School of Economics
Tatsuro Senga , Queen Mary University of London
Chang Sun , University of Hong Kong
Hongyong Zhang , Research Institute of Economy, Trade and Industry (RIETI)

October 14, 2017

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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.

J.E.L classification codes: E22, E32, D84, F51

Keywords:forecasts, pessimistic expectations, geopolitical events, investment