Working Paper: CEPR ID: DP155
Authors: Stephen Nickell; Sushil Wadhwani
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: myopia; stock market; dividends
JEL Codes: 313; 521
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock market attaches too high a weight to current dividends relative to future dividends (G35) | myopic valuation approach (G19) |
| myopic valuation approach (G19) | negative correlation between ex-post returns and dividend yield (G35) |
| institutional ownership rising from 42% to 59% (G34) | no measurable change in the weight attached to current dividends (G35) |
| myopic valuation approach (G19) | challenges efficient market hypothesis (G14) |