Investors Cognitive biases Effect on Stock Valuation

From 1980, when behavioral Faineance was raised, rationality of investors and stock exchange efficiency were criticized. The behavioral finance literature assumes that investors are subject to behavioral biases and overreact or under react to information received that results in stock misevaluation. In this paper stock misevaluation is measured following Rodes-Kropf et.al.(2005) and based on financial information of individual firms and industries. This model presents a new measure of examining misevaluation and predicting future stock return. After examining the models in Tehran Stock Exchange (TSE), we construct portfolios on Misv and then investigate investors reaction to the information trends. The results show that there are overreaction and under reaction in TSE affected by Representativeness bias and overconfidence and MISV is related with firm size, B/M ratio, liquidity rate, firm age, past stock price and return and EPS.