Survey evidence on the rationality of business expectations on Malaysian agricultural sector

Abstract

The rational expectations hypothesis (REH) serves as an appealing mechanism in forming expectations because of its consistency with the basic principles of maximizing behavior. The present study intends to provide empirical support of forecast rationality in the context of survey-based business expectations, particularly in agriculture-based entities in Malaysia. Three rationality tests which include unbiasedness test, non-serial correlation test and weak form efficiency test have been utilized in the study. Empirical findings 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.