The Impact of Investor Overconfidence on the Value Relevance of Accounting Data and Information

Abstract:
Information extracted from financial statements has always been a key resource for investor decision-making in financial markets and is expected to play a significant role in stock valuation and return analysis. However, the behavioral finance approach indicates that a portion of market price volatility stems from non-economic factors and behavioral biases, such as overconfidence, which can lead to deviations in the true pricing of assets. Focusing on investor overconfidence, the present study examines the role of this psychological factor in altering the strength of the relationship between accounting information and market valuation. For this purpose, 1,300 firm-year observations were analyzed using panel data multivariate regression and the Generalized Least Squares (GLS) estimator. To measure overconfidence, a final composite index was extracted from six alternative proxies through factor analysis. The results indicate that during periods of high overconfidence, earnings per share exhibit a stronger relationship with stock returns and prices, whereas during periods of low overconfidence, other accounting variables such as book value of assets, shareholders' equity, and operating cash flow play a more prominent role in explaining returns and prices. These findings confirm the moderating effect of overconfidence in analyzing the value of accounting information and emphasize the necessity of considering behavioral biases in financial analysis.
Keywords: Overconfidence, Investors, Value Relevance, Behavioral Finance