THE INVESTIGATION OF INVESTORS’ OVERREACTION TO PATTERNS OF PAST FINANCIAL PERFORMANCE MEASURES: EVIDENCE FROM TEHRAN STOCK EXCHANGE

Abstract

The researchers who have studied overreaction of stockholders have concluded that investors overreact to the past financial performance of firms.  Firm that achieved high past financial performance tend to be overvalued; eventually, stock prices of these firms return to their fundamentals, resulting in low returns over longer horizons. On the other hand, firms that experienced poor past financial performance become under-priced and subsequently their shares earn higher return. This article examines the overreaction of stockholders of Tehran Stock Exchange. This study was performed without controlling the effect of B/M ratio and ‘market capitalizations (size)’ in the first stage and by controlling the B/M ratio and size as risk criteria in the second stage. Time period of research was eight years since 1999 to 2006. Our sample is constructed from all stocks traded on the Tehran Stock Exchange (TSE) and the research method was Portfolio Test. Two sample independent t-test was used for data analysis. The results indicate that stockholders in Tehran Stock Exchange overreact to earnings before extraordinary items and discontinued operations, sale and return of Stock but do not overreact to cash flow variable.