The Impact of Investors' Emotional Decision Patterns on Firm Performance

The efficient market hypothesis is based on the assumption that investors behave rationally, but studies in behavioral finance have contradicted this notion. The irrationality of investor behavior can be attributed to risk in less efficient markets, which can lead them to make decisions based on emotions. These emotional decisions impact firm performance. This study is to determine the influence of two investor behaviors, "loss aversion" and "overconfidence," on the performance of companies listed on the Tehran Stock Exchange. Loss aversion serves as an indicator of negative emotions, while overconfidence serves as an indicator of positive emotions. This study, to the best of our knowledge, is among the initial research in Iran's financial field to utilize loss aversion and overconfidence as indicators of negative and positive emotions, respectively. Based on these objectives, two hypotheses were developed in this study. The statistical population of this research consists of companies listed on the Tehran Stock Exchange (TSE). Data required for the statistical analysis were obtained from various sources, including the Rahvard Novin software, the TSE Technology Management Company website, and the financial statements of the companies. To test these hypotheses, a sample of 156 companies, listed on the Tehran Stock Exchange between 2013 and 2020, was selected using the screening method. The research questions were answered using the panel data method, descriptive statistics, correlation analysis, and multivariate regression model. The findings shed light on the correlation between investors' behavior and the performance of companies on the TSE. The study reveals a strong negative correlation between investors' loss aversion and the economic performance of companies. This suggests that more loss-averse investors tend to contribute to the lower economic performance of companies. Furthermore, the study shows a positive correlation between investors' overconfidence and market performance. This suggests that companies with more confident investors tend to perform better in the market. Interestingly, the study also found that Iranian investors tend to be more overconfident than risk-averse, meaning that their overconfidence outweighs their tendency to be loss-averse. This generally optimistic attitude of investors in the TSE has a positive impact on the overall market performance by encouraging investment and boosting market confidence. Loss aversion bias can lead investors to hold onto loss-making investments due to their fear of realizing losses. Pessimism and unfavorable stock market conditions may cause investors to prioritize avoiding losses over making strategic investment choices, ultimately reducing the economic performance of the company. Additionally, the overconfidence bias can cause investors to underestimate the risks associated with assets, leading them to base their investment decisions solely on simple criteria they deem important in their minds, without exercising sufficient care and attention. The rise in demand may lead to an increase in the securities' price, ultimately enhancing the overall value of the company.