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Testing for short-termism in the UK stock market

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Author Info
David Miles

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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. Prima facie evidence that these longer-term discount rates are too high is found, a result consistent with the existence of short-termism.

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Paper provided by Bank of England in its series Bank of England working papers with number 4.

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Handle: RePEc:boe:boeewp:4

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  1. Grant, S. & Quiggin, J., 2001. "The risk premium for equity : explanations and implications," Discussion Paper 89, Tilburg University, Center for Economic Research. [Downloadable!]
  2. Gunther Tichy, 2002. "Informationsgesellschaft und flexiblere Arbeitsmärkte [Information society and flexible labour markets]," ITA manu:scripts 02_03, Institute of Technology Assessment (ITA). [Downloadable!]
  3. C. L. Marston, B. M. Craven, 1998. "A survey of corporate perceptions of short-termism among analysts and fund managers," European Journal of Finance, Taylor and Francis Journals, vol. 4(3), pages 233-256, September. [Downloadable!] (restricted)
  4. 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. [Downloadable!]
  5. E Philip Davis, 2005. "The Role Of Pension Funds As Institutional Investors In Emerging Markets," Economics and Finance Discussion Papers 05-18, Economics and Finance Section, School of Social Sciences, Brunel University. [Downloadable!]
  6. 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. [Downloadable!]
  7. Istemi S. Demirag, 1998. "Boards of Directors' short-term perceptions and evidence of managerial short-termism in the UK," European Journal of Finance, Taylor and Francis Journals, vol. 4(3), pages 195-211, September. [Downloadable!] (restricted)
  8. Ian Davidson, Chris Mallin, 1998. "The influence of earnings per share on capital issues: some evidence from UK companies," European Journal of Finance, Taylor and Francis Journals, vol. 4(3), pages 305-309, September. [Downloadable!] (restricted)
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