Mari Tanaka, Nicholas Bloom, Joel David, Maiko Koga, 25 August 2018

What is the effect of firms’ beliefs on their decisions and performance? This column explores this link using a unique survey of Japanese firms’ quantitative forecasts of future GDP growth combined with detailed company accounting data for over 1,000 large Japanese firms over 25 years. Firms’ input decisions and subsequent profit and productivity are found to react strongly to expectations of macroeconomic conditions, while significant heterogeneity in forecast accuracy across firms appears to be related to observable characteristics such as productivity, size, age, and governance structure. The results highlight a key role of firms’ forecasting ability for micro and macro performance.

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