Stock Market Expectations Research Articles

Stock-Related Compensation and Product-Market Competition

This paper shows that as long as agents in financial markets have rational expectations and firms pay out dividends, most common stock-based managerial compensation plans greatly facilitate tacit collusion in long-run (repeated) oligopolies. They may make the joint monopoly agreement supportable at any level of the discount factor. Stock-based incentives link managers' present compensation to the stock market's expectations about firms' future profitability. When a breach of a tacit collusive agreement occurs, a stock market with rational expectations anticipates the negative effect of the breach on firms' future profitability due to the forthcoming market war, and immediately discounts it on the stock price. Because this effect occurs in the same period in which a manager deviates, incentives linked to stock price directly reduce managers' gains from breaking any collusive agreement. When stock-based incentives are deferred, the pro-collusive effect is reinforced since the already limited beneficial effect on the stock price of short-run profits from a unilateral breach of a collusive agreement may be completely gone at the time when the manager receives the bonus.

La formation des anticipations boursières

Formation of Stock Market Expectations, by Georges Prat. This article analyzes how "experts" (businessmen, economists and bankers) form their expected changes in the industrial share price index. Expectations are measured by the "consensus" revealed by opinion polls made by J. Livingston in June and December of each year from 1956 to 1989. After showing that these expectations are not in line with the general rationality criteria, an analysis is made of the classic adaptive, extrapolative and regressive expectation processes (based on limited past information for the variable studied). Although each of the three basic processes is invalidated when considered separately, it is shown that approximately 40% of the expected share-price changes can be "explained" by "combining" these three processes in a LIERAM (Limited Information, Extrapolative, Regressive and Adaptive Model), whereas the figure rises to 95% for expected inflation when using the same LIERAM. These comparative results urge an examination of the hypothesis according to which experts' expectations are determined in the context of the share evaluation model (EM), which implicitly uses an expected value for share prices. The LIERAM and EM appear to be complementary, but together are only able to "explain" half of the stock market expectations.