An evaluation of investorsʹ overreaction to past financial function criteria: Iranian evidence

One of the assumptions of the efficient market hypothesis is that logical reaction of investors to known and available data cause the cost of invested wealth to approach its main cost. However, the experience shows that the behavior of investors in capital market has not always been correct and market cooperators show overreaction to new data. The aim of this study is to determine whether or not the investors have assigned a higher level for the stock of companies that have acquired rather high criteria in the past from the real values, and whether or not the prices of these stocks will return to their original costs and experience the return of previous returns. Similarly, the companies that have had rather weak return in the past have been valued in lower price by experts and will acquire more return as compared to their partners in the next periods. Among the financial functional criteria, average of sales growth rate, average growth of operational profit, average annual return and average cumulative abnormal return (ACAR) have been selected and four hypotheses have been tested in Tehran Stock Exchange during 2001 to 2009. The evidences of the present research show that the investors in Tehran Stock Exchange have shown overreaction to financial function criteria.