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

Wong, Shirly Siew-Ling and Puah, Chin-Hong and Shazali, Abu Mansor (2011): Survey Evidence on the Rationality of Business Expectations: Implications from the Malaysian Agricultural Sector. Published in: Economic Computation and Economic Cybernetics Studies and Research , Vol. 45, No. 4 (December 2011): pp. 169-180.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Rational Expectations Hypothesis; Unbiasedness Test; Non-serial Correlation Test; Weak-form Efficiency Test
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology ; Computer Programs > C83 - Survey Methods ; Sampling Methods; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q10 - General

References

Aggarwal, R., Mohanty, S., & Song, F. (1995). Are survey forecasts of macroeconomic variables rational? Journal of Business, 68(1), 99-119.

Beach, E.D., Fernandez-Cornejo, J., & Uri, N.D. (1995). Testing the rational expectations hypothesis using survey data from vegetable growers in the USA. Journal of Economic Studies, 22(6), 46-59.

Department of Statistics Malaysia. Business Expectations Survey of Limited Company, various issues. Putrajaya: Department of Statistics Malaysia.

Dias, F., Duarte, C., & Rua, A. (2008). Inflation expectations in the euro area: Are consumer rational? Banco de Portugal, Working Paper 23-2008.

Dickey, D., & Fuller, W. (1981). Likelihood ratio statistic for autoregressive times series with a unit root. Econometrica, 49(4), 1057-1072.

Dickey, D., and Fuller, W. (1979). Distribution of the estimators for autoregressive times series with a unit root. Journal of the American Statistical Association, 74(366), 427-431.

Dominguez, K. (1986). Are foreign exchange forecasts rational? New evidence from survey data. Economic Letters, 21(3), 277-282.

Dwyer, G.P.Jr., William, A.W., Battaliio, R.C., & Mason, T.I. (1989). Tests of rational expectations in a stark setting. The Federal Reserve Bank of St Louis, Research Paper, No. 89-001.

Engle, R.F., & Granger, C.W.J. (1987). Cointegration and error correction, estimation and testing. Econometrica, 55(2), 251-276.

Evans, G., & Gulamani, R. (1984). Tests for rationality for the Carlson-Parkin inflation expectation data. Oxford Bulletin of Economics and Statistics, 46(1), 1-19.

Fischer, A.M. (1989). Unit roots and survey data. Oxford Bulletin of Economics and Statistics, 51(4), 451-463.

Forsells, M., & Kenny, G. (2002). The rationality of consumers’ inflation expectations: Survey-based evidence for the euro area. European Central Bank, Working Paper, No. 163.

Friedman, D. (1980). Survey evidence on the rationality of interest rate expectations. Journal of Monetary Economics, 6(4), 453-465.

Gao, F., Song, F.M., & Wang, J. (2008). Rational or irrational expectations? Evidence from China’s stock market. Journal of Risk Finance, 9(5), 432-448.

Granger, C.W.J. (1986). Developments in the study of cointegrated economic variables. Oxford Bulletin of Economics and Statistics, 48(3), 213-228.

Habibullah, M.S. (1994). Do business firm in developing economy make rational economic forecast? The evidence from Malaysia business expectations survey of limited companies. Asian Economies, 23(4), 73-92.

Habibullah, M.S. (1996). Forecasting economic variables in the agricultural sector: Testing rational expectations hypothesis on survey data. Pakistan Journal of Applied Economics, 12(2), 171-184.

Habibullah, M.S. (2001). Rationality of insurance firms’ forecasts: Results of unbiasedness and efficiency tests. Malaysia Management Journal, 5(1&2), 107-117.

Keane, M.P., & Runkle D.E. (1990). Are economic forecasts rational? Federal Reserve Bank of Minneapolis Quarterly Review, 13(2), Spring, 26-33.

Levine, D.I. (1993). Do corporate executives have rational expectations? The Journal of Business, 66(2), 271-293.

Mackinnon, J.G. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11(6), 601-618.

Mitchell, K., & Pearce, D.K. (2005). Professional forecasts of interest rates and exchange rates: Evidence from the Wall Street Journal’s panel of economists. Department of Economics, North Carolina State University, Working Paper, No. 004.

Mullineaux, D.J. (1978). On testing for rationality: Another look at the Livingston price expectations data. The Journal of Political Economy, 86(2), 329-336.

Muth, J.F. (1961). Rational expectations and the theory of price movements. Econometrica, 29(3), 315-335.

Nielsen, H. (2003). Inflation expectations in the EU rational? Paper presented at the Eighth Spring Meeting of Young Economists, Catholic University of Leuven, Belgium.

Osterberg, W.P. (2000). New results on the rationality of survey measures of exchange-rate expectations. Federal Reserve Bank of Cleveland Economic Review, 36(1), 14-21.

Theil, H. (1966). Applied Economic Forecasting. North-Holland: Amsterdam.