Short-termism, earnings and asset prices

This study examines a simple theory in which investors with short-termism behaviors to show the influence of short-termism on the relation between earnings, returns, and return volatility, and then we examine the empirical evidences from our theory. It first illustrates how asset prices may fluctuate more than the fundamental value when investors have short-termism behaviors. The result of excess asset price volatility in relation to earnings is presented. Asset price volatility is also shown to be positively related with the degree of short-termism and the variation in earnings. Then, we empirically examine the influence of short-termism in the relation between earnings and stock returns, and between earnings volatility and return volatility. Our observation indicates that the empirical results support the theory of short-termism.