Looking Inside the Magic 8 Ball : An Analysis of Sales Forecasts using Italian Firm-Level Data

This paper explores firm forecasting strategies. Using Italian data, we focus on two aspects of the forecasting process: how firms forecast sales and how accurate their predictions are. We relate both outcomes to current conditions, firm experience, global factors, and other firm characteristics. We find that current conditions tend to explain most of the variability in the sales forecast. While past projection errors tend to account for cross-firm differences in models of expectation formation, they are a key explanatory variable in models of forecast accuracy. Among other controls, firm size, experience, and global conditions--through the effect of price changes that the firm anticipates--shape firm expectations and influence the projection errors. Our findings suggest that models of sales expectations should take firm characteristics and market heterogeneity into account.