A Quantitative Analysis of Distortions in Managerial Forecasts

65 Pages Posted: 14 Jun 2018 Last revised: 20 Feb 2024

See all articles by Yueran Ma

Yueran Ma

University of Chicago - Booth School of Business

Tiziano Ropele

Bank of Italy

David Alexandre Sraer

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: February 19, 2024

Abstract

This paper quantifies the economic costs of distortions in managerial forecasts. We exploit a long panel of managerial forecast errors and investment decisions of a representative sample of Italian firms. Our analysis relies on three key features of the data: (1) on average, sales forecasts are unconditionally unbiased and the standard deviation of sales forecast errors is 17.0% (2) managerial forecasts are conditionally biased, i.e., errors are autocorrelated with an AR(1) coefficient of 0.331, suggesting underreaction (3) while investment responds significantly to sales-forecast, the elasticity of firms’ capital stock to sales forecast is significantly smaller than one, at 0.485. We quantitatively interpret these findings through the lens of standard Q-model with distorted expectations. Distortions in expectation reduce firm value by 1.5%, and lower aggregate productivity by 0.76%. These findings remain unchanged when we introduce additional frictions (e.g., fixed adjustment costs, financial constraints) and behavioral biases (e.g., optimism).

Keywords: Expectation Formation; Misallocation; Corporate Investment

JEL Classification: D61; D84

Suggested Citation

Ma, Yueran and Ropele, Tiziano and Sraer, David Alexandre and Thesmar, David, A Quantitative Analysis of Distortions in Managerial Forecasts (February 19, 2024). Available at SSRN: https://ssrn.com/abstract=3187021

Yueran Ma

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Tiziano Ropele

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

David Alexandre Sraer (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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