Examining the effects of behavioral biases of investors on Tehran Stock Exchange efficiency using trends and consistency in firms’ financial performance during 1997-2006

Bahman Gholami,Darush Rahmati,Mehdi Goudarzi

doi:10.21511/ppm.14(3-si).2016.07

Bahman Gholami, Darush Rahmati + Show 1 more

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https://doi.org/10.21511/ppm.14(3-si).2016.07

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Abstract

The present study investigates the effects of behavioral biases on the efficiency of Tehran stock exchange. In fact, these biases are the mistakes that individuals make while making financial decisions. The methodology of this research is that firms with financial information during 1997 to 2006 that have also been active on the stock exchange have been classified based on two criterions of operating profit/per share and earnings per share, then, the return of these firms was calculated in the first period and compared to their return in the second period. Therefore, it will be clear that the companies’ financial performance trend has been effective on the behavioral biases of investors and consequently on their extreme reactions towards the published information. Therefore, the process of the stock return changes can be predicted in the coming period. As a result, this hypothesis is an evidence of market inefficiency and predictability of financial behavioral theories. On the other hand, this research does not offer sufficient and strong evidences on the effect of consistency in the financial performance process and also the presence of compatible and incompatible signs in companies’ financial performance on the market predictability. Thus, in this case, it is not possible to admit the effect of behavioral biases on the predictability and thus market efficiency. Keywords: behavioral finance, financial performance, behavioral bias, representation, conservatism. JEL Classification: G02, G23, M41

Highlights

On the other hand, this research does not offer sufficient and strong evidences on the effect of consistency in the financial performance process and the presence of compatible and incompatible signs in companies’ financial performance on the market predictability
This research does not offer sufficient and strong evidences on the effect of consistency in the financial performance process and the presence of compatible and incompatible signs in companies’ financial performance on the market predictability. In this case, it is not possible to admit the effect of behavioral biases on the predictability and market efficiency
One of the way of identification method of these behaviors is according to behavioral finance

Summary

Introduction

This research does not offer sufficient and strong evidences on the effect of consistency in the financial performance process and the presence of compatible and incompatible signs in companies’ financial performance on the market predictability In this case, it is not possible to admit the effect of behavioral biases on the predictability and market efficiency. Empirical studies of individuals’ stock behavior and even market stock index led to discovery phenomena and facts that were hardly justified by EMH These facts, which are usually called “anomalies” in financial literature, prove that some stocks systematically obtain higher average returns than other stocks while the risk factor of this stock doesn’t increase to obtain such benefit. The first component is the investors’ preferences that should be reflected in the investment process and the second part is cognitive beliefs or orientations which emergence must be prevented in investment processes (Nevins, L., 2004)

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