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Testing for short-termism in the UK stock market

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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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1992/wp04.pdf
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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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Date of creation: Oct 1992
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Handle: RePEc:boe:boeewp:4
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  1. 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.
  2. 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.
  3. 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.
  4. Shiller, Robert J, 1990. "Market Volatility and Investor Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 58-62, May.
  5. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  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. 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, November.
  9. Narayanan, M P, 1985. "Observability and the Payback Criterion," The Journal of Business, University of Chicago Press, vol. 58(3), pages 309-23, July.
  10. Fama, Eugene F, 1970. "Multiperiod Consumption-Investment Decisions," American Economic Review, American Economic Association, vol. 60(1), pages 163-74, March.
  11. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  12. 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.
  13. 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.
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