Myopia, the 'Dividend Puzzle', and Share Prices

Stephen Nickell and Sushil Wadhwani

No 155, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The view that the stock market is myopic is commonly expressed in the financial press. However, the existing econometric evidence does not support this view. In this paper, we report econometric evidence suggesting that the market attaches too high a weight to current dividends relative to future dividends. This is consistent with the widely-held belief that the market is myopic. The main reason that we obtain a different result is that we estimate a model that is more general than the standard approach. However, we find no evidence to link this myopic behaviour with increased institutional ownership of equity. Our evidence can also be interpreted as a rejection of the standard efficient markets model, even when we allow for a time-varying discount rate. In addition our test does not depend on the time-series properties of dividends (e.g. we do not require stationarity).

Keywords: Dividends; Efficient Markets; Myopia; Stock Market (search for similar items in EconPapers)
Date: 1987-02
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