In this paper we quantify the economic effects of Italian managers' sales forecast errors. Through the estimation of a theoretical model with heterogeneous firms - in which managers may formulate distorted forecasts due to behavioral biases - we analyse the implications that sales forecast errors have on corporate investment decisions and on total factor productivity at aggregate level. To this end, we use data from the Survey of Industrial and Service Firms and balance sheet data from Cerved.
We show that managers make systematic sales forecast errors as a result of the muted reaction to productivity shocks (underreaction) that marks the formulation process of their expectations. Consequently, in response to positive (negative) productivity shocks, a manager with distorted expectations invests less (more) compared with a hypothetical manager with rational expectations. However, these expectation biases exert only negligible effects on total factor productivity at aggregate level.
