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The effect of underreaction and overreaction of firm stocks to firm valuation: data from the Indonesian Stock Exchange

Author

Listed:
  • Puji Handayati
  • Lioni Indrayani
  • Yohanes Indrayono

Abstract

This study contributes to the literature on behavioural finance by providing a case study on underreaction and overreaction uses in the model of investor sentiment of firm stocks firm valuation in the Indonesian listed firms. The results indicate that businesses with more intangible assets can better measure overreaction as compared to those with more tangible assets. The firms' value is found to positively correlate with total assets and profits for companies in which their stocks are characterised by overreaction but have no correlation to book value. Financial institutions and stocks in the wholesale industry demonstrated remarkable overreactions. However, the automotive, building and construction, food and beverage, and cement industry show evidence of higher underreaction. This study identifies that most stocks are considered as the overreaction to news of a firm's financial statements. Investors may buy stocks from the business with more tangible assets which are profitability and sales increase.

Suggested Citation

  • Puji Handayati & Lioni Indrayani & Yohanes Indrayono, 2023. "The effect of underreaction and overreaction of firm stocks to firm valuation: data from the Indonesian Stock Exchange," International Journal of Business and Systems Research, Inderscience Enterprises Ltd, vol. 17(2), pages 121-142.
    • Handle: RePEc:ids:ijbsre:v:17:y:2023:i:2:p:121-142
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