What were they thinking? Firms' expectations since the financial crisis
ISSN: 1940-5979
Article publication date: 17 April 2020
Issue publication date: 15 October 2021
Abstract
Purpose
This paper explores how firms formed their expectations about the availability of bank finance since the financial crisis. Various expectations hypotheses that incorporate backward and/or forward-looking elements and inattention are tested. From a policy perspective, the most important hypothesis is whether policy announcements have a direct impact on the expectations of companies.
Design/methodology/approach
The analysis is based on a large sample of euro area companies from the ECB “Survey on the Access to Finance of Enterprises” between 2009 and 2018. Ordered logit models are used to relate individual replies on expectations to firms' information available at the time of the forecasts. The model controls for the business cycle and firms' structural characteristics. Using a difference-in-differences approach, we test how policy announcements may affect expectations.
Findings
Firms update what otherwise look like adaptive expectations on the basis of new information. The hypothesis of rational expectations is rejected. Moreover, we do not find evidence of inattention or of a wave of pessimism/optimism. The analysis of expectations around the time of the ECB Outright Monetary Transactions program provides some evidence of forward-looking expectations.
Originality/value
The paper contributes to the literature on expectations by using a novel survey in eleven countries. In the multi-country setting, country-specific business cycle effects and waves of pessimism or optimism are better controlled for. The policy announcements of summer 2012 provide for a natural experiment to test the direct impact of such announcements on expectations, an issue of relevance for the monetary policy transmission to economic activity.
Keywords
Acknowledgements
This papers forms a part of special section “Financial Sentiment: Theory and Applications’ and from ‘The 2019 Behavoural Finance Working Group Conference”, guest edited by Robert Hudson and Gulnur Muradoglu.We thank the participants of the 2019 Working Group on Behavioural Finance Conference, the 26th Annual Conference of the Multinational Finance Society and an ECB workshop for useful suggestions and comments. Research assistance by Evgeni Piryankov at an early stage of this project is gratefully acknowledged. This paper contains the views of the authors and not necessarily those of the European Central Bank or the Eurosystem.
Citation
Ferrando, A., Ganoulis, I. and Preuss, C. (2021), "What were they thinking? Firms' expectations since the financial crisis", Review of Behavioral Finance, Vol. 13 No. 4, pp. 370-385. https://doi.org/10.1108/RBF-07-2019-0084
Publisher
:Emerald Publishing Limited
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