Overreaction and representativeness heuristic in initial public offering: Evidence from Tehran Stock Exchange

Abstract

The subject of initial public offering (IPO) and the unusual short-time return of compared with another stocks, allocated many studies and researches in world level and in stock market to itself. The studied researches pointed to the short-time return of IPOs, which are higher than market and its long term return in return. One of the main hypothesis of behavioral finance is overreaction that is the main factor of overreaction in investor behavior is representativeness heuristic. This paper investigates overreaction behavior on shares of IPOs in Tehran stock exchange by considering 2 strategies of buy and hold and cumulative average return. The study investigates the effects of different factors such as price, market value, prior return and trading volume on overreaction. The results show negative effects of price and transaction volume on overreaction. In another words, price and volume of transactions are lower (higher) and higher return (lower) and therefore increased overreaction.