The market does a pretty good job valuing individual stock prices, but a lousy job valuing the market as a whole, argue some prominent academics, adding a new twist to the debate between efficient-market theorists and behavioral finance types.
In a 1998 letter, Paul A. Samuelson hypothesized that the market shows "microefficiency," in that a relative handful of investors spot pricing discrepancies and arbitrage away these inefficiencies. But the 1970 Nobel Laureate for economics also hypothesized there is "considerable macroinefficiency," in that markets move in waves both above and below fundamental values.
Now, a draft paper by Robert J. Shiller, the Stanley B. Resor Professor of Economics at Yale University, New Haven, Conn., and author of "Irrational Exuberance," and Jeeman Jung, a professor at Sangmyung University in Seoul, finds support for these hypotheses.
By analyzing stocks from 1926 through 2001, they found that dividend-price ratios can reliably predict growth rates in real dividends. But looking at the whole universe of 49 firms that existed throughout the 75-year period, they found raging inefficiency. "If anything, high aggregate dividend-price ratios predict high aggregate dividend growth, and so there is no evidence of macroefficiency," they wrote.
One message to be gleaned from the paper, said Richard Ennis, principal at Ennis, Knupp & Associates, Chicago, is that giving managers greater leeway will create "a greater opportunity to exploit mispricing."
But Russell J. Fuller, president of Fuller & Thaler Asset Management, San Mateo, Calif., found the paper "very disappointing." The results, only 49 firms survived for the entire period, are subject to survivor bias, he told Pensions & Investments.
While the authors wrote that survivor bias should not affect their findings, Mr. Fuller argued the list of surviving stocks is "so unusual ... that no one should draw any inferences from them."
