It is widely believed that the UK stock market is 'myopic'. Previous econometric studies of the stock market have not, however, suggested that the market attaches too great an importance either to dividends relative to capital gains, or to current relative to future dividends. In Discussion Paper No. 155, Research Fellows Stephen Nickell and Sushil Wadhwani argue that previous econometric tests of myopia have made no allowance for 'fads' in the stock market. The market may experience waves of pessimism (as in 1974) or optimism (as in the 1960s) which are not justified by the economic fundamentals. There may also be firm-specific 'fads': individuals may rationally value shares in terms of what other people think they are worth, since this determines the potential for speculative gain.

Nickell and Wadhwani allow for the effects of such 'fads' in their econometric estimates of the behaviour of share prices and dividends for 195 UK industrial firms over 1973-80. These estimates suggest a 'new' conclusion: share prices attach a weight to current dividends 6 to 8.5 times greater than would be the case if the market were 'efficient'. Moreover, although the proportion of equities owned by financial institutions rose from 42% to 59% over this period, there was no measurable increase in the relative weight attached to current dividends. This suggests that individual shareholders were just as myopic as institutions.

Sushil Wadhwani discussed these findings at a lunchtime meeting reported more fully elsewhere in this Bulletin.