Testing for Short Termisn in the UK Stock Market

David Miles

Economic Journal, 1993, vol. 103, issue 421, 1379-96

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.

Date: 1993
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Working Paper: Testing for short-termism in the UK stock market (1992)
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