Testing for short-termism in the UK stock market

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 01 October 1992

Working Paper No. 4
By David Miles

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. We find prima facie evidence that these longer-term discount rates are too high, a result consistent with the existence of short-termism. 

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