Is the U.S. Stock Market Myopic?

Abstract

This paper tests whether the U.S. stock market is myopic in the sense of overvaluing short-term earnings and undervaluing long-term earnings (see, e.g., Porter [1992; 1993]). Our tests rely on an accounting-based valuation model that generates predictions about how prices should relate to expected future earnings under the null hypothesis of market efficiency.' Using this model and Value Line earnings forecasts for a sample of firms during the period 1978-93, we estimate the value an efficient market would have assigned to firms' book values as well as near-term and long-term expected earnings. Regressions of actual stock prices against these estimates (Test 1) are used to infer whether market agents underprice long-term earnings, relative to current book value and near-term earnings. Our regression estimates from Test 1 are consistent with either such mispricing orwith certain forms of measurement error in Value Line data. Analyses of trading strategies that would exploit the mispricing caused by market myopia (Test 2) suggest that measurement error is the