to competition from informal firms are significantly more likely to report negative or stable expected sales growth and significantly less likely to report positive expected sales growth.<sup>16</sup> This finding is confirmed when we consider as outcome a continuous version of the variable measuring expected sales growth (column 4) and when we consider only the sample of firms in the panel (column 5): firms more exposed to informal competition have worse expectations on future sales growth. One important observation concerns the actual level of firm-sales growth ( _Sales growth_ ): these results holds controlling for the realized growth of sales, which turn out to be positively correlated with growth expectations.

Table 6: Competition from informal firms and expectations on future sales

|Dependent variable:||E(Sales growth)||E(Sales|growth)|
|---|---|---|---|---|---|
||Negative<br>(1)|Stable<br>(2)|Positive<br>(3)|Conti<br>(4)|nuous<br>(5)|
|Constrained by informal_t−_1|0.0412***<br>[0.0122]|0.0509***<br>[0.0145]|-0.0921***<br>[0.0153]|-4.103***<br>[0.735]|-2.812**<br>[1.424]|
|Age_t−_1|-1.362**|-2.094***|3.456***|81.53**|80.39|
||[0.616]|[0.791]|[0.864]|[40.01]|[71.88]|
|Size_t−_1|-0.0251***<br>[0.00552]|-0.0279***<br>[0.00630]|0.0531***<br>[0.00626]|1.507***<br>[0.299]|1.608***<br>[0.553]|
|Sales growth_t−_1|-0.00471***<br>[0.000370]|-0.00120***<br>[0.000420]|0.00591***<br>[0.000435]|0.232***<br>[0.0194]|0.130***<br>[0.0352]|
|Export_t−_1|-0.0451***<br>[0.0169]|0.000915<br>[0.0201]|0.0442**<br>[0.0208]|2.054**<br>[0.989]|2.169<br>[1.756]|
|Sample||Full||Full|Panel|
|Model||Multinomial logit||OLS|OLS|
|Time FE||yes||yes|yes|
|Geographic area FE||yes||yes|yes|
|Additional controls||yes||yes|yes|
|Observations||4313||4191|1265|
|Pseudo R2 (R2)||0.231||0.310|0.367|

_Notes:_ OLS estimates and multinomial logistic marginal effects. The dependent variable in columns 1-3, we employ a categorical variable taking value -1, 0, and +1 in case of negative, stable, and positive expected sales growth, respectively. In Column 4, we employ a continuous measure for firms’ expected sales growth in the following year. Because expectations are forward looking, all regressors are simultaneous. Unreported controls follow the specification in Table 4. Variables are defined in Table B4. Robust standard errors in brackets. *, **, *** indicate statistical significance at the 10%, 5%, and 1%, respectively.

As a final step in our argument, we explore the relation between future sales expectations and loan application. In Table 7, columns 1 and 2 consider this link using the categorical version of the the expected sales growth variable. Column 1 indicates that - one controlled for firm size - better expected sales growth does not seems to increase the probability of loan application. Yet, when expectations are interacted with the firm size, a different pattern emerges. As shown in column 2, having positive sales growth expectation increases the probability of loan application even though the effect decreases with the size of the firm. Since firm size is positively correlated with loan application, this suggests that the role of expectations is important but becomes less important for firms which have characteristics which make them more likely to need a loan. These same findings are confirmed when we use the continuous variable for measuring expected sales growth (see column 3 and 4).<sup>17</sup> This finding adds to previous evidence in the literature on the effect of informal competition on formal 16Expectations are specific to the firm and unknown to the bank. Controlling for firms’ fundamentals and realized growth 16