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Testing for Short Termisn in the UK Stock Market

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  • Miles, David

Abstract

This paper uses data on the stock market valuations of a large sample of UK companies to assess if that market displays short-termism. Tests are undertaken of whether discount rates, implicit in market valuations, applied to cash flows which accrue in the longer term are too high, both absolutely and relative to the rates applied to cash flows in the near term. I find prima facie evidence that these longer-term discount rates are too high, a result consistent with the existence of short-termism. An alternative interpretation of the results is that risk premia applied to expected cash flows systematically increase with the maturity of those flows; whether this interpretation is consistent with asset pricing theories is questionable. Copyright 1993 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 103 (1993)
Issue (Month): 421 (November)
Pages: 1379-96

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Handle: RePEc:ecj:econjl:v:103:y:1993:i:421:p:1379-96

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  1. Shiller, Robert J, 1990. "Market Volatility and Investor Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 58-62, May.
  2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  3. Froot, Kenneth A & Scharftstein, David S & Stein, Jeremy C, 1992. " Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," Journal of Finance, American Finance Association, vol. 47(4), pages 1461-84, September.
  4. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  5. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  6. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  7. Stein, Jeremy C, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 655-69, November.
  8. Robert C. Merton, 1980. "On Estimating the Expected Return on the Market: An Exploratory Investigation," NBER Working Papers 0444, National Bureau of Economic Research, Inc.
  9. Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1, July.
  10. Shleifer, Andrei & Vishny, Robert W, 1990. "Equilibrium Short Horizons of Investors and Firms," American Economic Review, American Economic Association, vol. 80(2), pages 148-53, May.
  11. Friend, Irwin & Landskroner, Yoram & Losq, Etienne, 1976. "The Demand for Risky Assets under Uncertain Inflation," Journal of Finance, American Finance Association, vol. 31(5), pages 1287-97, December.
  12. Fama, Eugene F, 1970. "Multiperiod Consumption-Investment Decisions," American Economic Review, American Economic Association, vol. 60(1), pages 163-74, March.
  13. Narayanan, M P, 1985. "Observability and the Payback Criterion," The Journal of Business, University of Chicago Press, vol. 58(3), pages 309-23, July.
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Cited by:
  1. Rebers, E. & Beetsma, R.M.W.J. & Peters, H., 1997. "When to fire bad managers: The role of collusion between management and board of directors," Discussion Paper 1997-69, Tilburg University, Center for Economic Research.
  2. MacDonald, Ronald & Power, David, 1995. "Stock prices, dividends and retention: Long-run relationships and short-run dynamics," Journal of Empirical Finance, Elsevier, vol. 2(2), pages 135-151, June.
  3. Grant, Simon & Quiggin, John, 2003. "The Risk Premium for Equity: Implicatiosn for Resource Allocation, Welfare adn Policy," Working Papers 2003-14, Rice University, Department of Economics.
  4. Claudio Raddatz & Sergio Schmukler, 2010. "Pension Funds And Capital Market Development: How Much Bang For The Buck?," Working Papers 38, Superintendencia de Pensiones, revised Feb 2010.
  5. Dennis C. Mueller & Mark L. Sirower, 2003. "The causes of mergers: tests based on the gains to acquiring firms' shareholders and the size of premia," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(5), pages 373-391.
  6. E. Philip Davis, 2004. "Is there a Pensions Crisis in the U.K.?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 29(3), pages 343-370, July.
  7. Davies, Richard & Haldane, Andrew G. & Nielsen, Mette & Pezzini, Silvia, 2014. "Measuring the costs of short-termism," Journal of Financial Stability, Elsevier, vol. 12(C), pages 16-25.
  8. Lahiri, Poulomi & Chakraborty, Indrani, 2014. "Explaining dividend gap between R&D and non-R&D Indian companies in the post-reform period," Research in International Business and Finance, Elsevier, vol. 30(C), pages 268-283.
  9. Mosolygó, Zsuzsa, 2010. "A tőkefedezeti rendszer alapkérdéseinek új megközelítése
    [A new approach to the basic issues raised by the PAYE system]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 612-633.
  10. Stephen Nickell & John Van Reenen, 2001. "Technological Innovation and Performance in the United Kingdom," CEP Discussion Papers dp0488, Centre for Economic Performance, LSE.
  11. Angela Black & Patricia Fraser & Martin Hoesli, 2005. "House Prices, Fundamentals and Inflation," FAME Research Paper Series rp129, International Center for Financial Asset Management and Engineering.
  12. Davis, E. Philip, 2002. "Institutional investors, corporate governance and the performance of the corporate sector," Economic Systems, Elsevier, vol. 26(3), pages 203-229, September.
  13. George Christodoulakis, 2012. "Conditions for rational investment short-termism," Annals of Finance, Springer, vol. 8(1), pages 15-29, February.
  14. Segelod, Esbjorn, 2000. "A comparison of managers perceptions of short-termism in Sweden and the U.S," International Journal of Production Economics, Elsevier, vol. 63(3), pages 243-254, January.
  15. Grant, S. & Quiggin, J., 2001. "The Risk Premium for Equity: Explanations and Implications," Discussion Paper 2001-89, Tilburg University, Center for Economic Research.
  16. Marianne Rubinstein, 2001. "Gouvernement d’entreprise et innovation," Revue d'Économie Financière, Programme National Persée, vol. 63(3), pages 211-229.
  17. Gunther Tichy, 2002. "Informationsgesellschaft und flexiblere Arbeitsmärkte [Information society and flexible labour markets]," ITA manu:scripts 02_03, Institute of Technology Assessment (ITA).
  18. Ian Davidson & Chris Mallin, 1998. "The influence of earnings per share on capital issues: some evidence from UK companies," The European Journal of Finance, Taylor & Francis Journals, vol. 4(3), pages 305-309.

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