Do Investor Overreact and Overconfidence? The Evidence from Initial Public Offering in Indonesia

Study on a phenomenon of underpricing and the declining performance of underpriced stocks are still unresolved. This research explains the causation of underpricing and it performance at a long time later. The results of this study confirm the behavioral finance theory on the dynamic capital market, especially confirm Overreaction Hypothesis (OH) on Initial Public Offering (IPO) activity. Underpricing at IPO activity caused by the overconfidence of investor, in which it behavior stimulate the overreaction investor’s demand on offered stocks. The high demand for stocks will increase stocks’ price above it intrinsic value. Therefore, it the price will be corrected in a long time later, it is proven by the declining long-run performance of underpriced stocks.