Examining the effects of behavioral biases of investors on Tehran Stock Exchange efficiency using trends and consistency in firms’ financial performance during 1997-2006

The present study investigates the effects of behavioral biases on the efficiency of Tehran stock exchange. In fact, these biases are the mistakes that individuals make while making financial decisions.
The methodology of this research is that firms with financial information during 1997 to 2006 that have also been active on the stock exchange have been classified based on two criterions of operating profit/per share and earnings per share, then, the return of these firms was calculated in the first period and compared to their return in the second period. Therefore, it will be clear that the companies’ financial performance trend has been effective on the behavioral biases of investors and consequently on their extreme reactions towards the published information. Therefore, the process of the stock return changes can be predicted in the coming period. As a result, this hypothesis is an evidence of market inefficiency and predictability of financial behavioral theories. On the other hand, this research does not offer sufficient and strong evidences on the effect of consistency in the financial performance process and also the presence of compatible and incompatible signs in companies’ financial performance on the market predictability. Thus, in this case, it is not possible to admit the effect of behavioral biases on the predictability and thus market efficiency.

Keywords: behavioral finance, financial performance, behavioral bias, representation, conservatism.
JEL Classification: G02, G23, M41