The impact of overconfidence on stock market valuation: An empirical study on listed firms

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Abstract

Behavioral theory predicts that investor overconfidence leads to overpricing because overconfident investors overestimate the accuracy and quality of their information while underestimating risk (Adebambo & Yan, 2018). The paper investigates the impact of the overconfidence psychology of investors on firm valuation in the Vietnamese stock market. To test this relationship, the secondary data of 264 non-financial firms listed on the Ho Chi Minh Stock Exchange (HOSE) is investigated in the period of seven years from 2016–2022. The current study applies three different regression models, in which two alternative models are used to ensure the results are not sensitive to the variable proxy. This research employs the change in trading volume (CTV) variable as a main variable proxy of overconfidence and applies the feasible generalized least squares (FGLS) method as the main estimation. As a result, this study confirms the positive impact of overconfidence bias on firm valuation on the HOSE, regarding different investor overconfidence proxies since all of the proxies are statistically significant. These empirical results have several implications for market regulators, investors, and academic researchers as well as for investment costs, capital allocation, and market effectiveness.

Keywords: Overconfidence, Firm Valuation, Behavioral Biases, Vietnamese Stock Market

Authors’ individual contribution: Conceptualization — M.T.P.; Methodology — M.T.P. and P.T.D.; Validation — P.T.D.; Investigation — M.T.P. and P.T.D.; Resources — M.T.P.; Data Curation — M.T.P. and P.T.D.; Writing — Original Draft — M.T.P. and P.T.D.; Writing — Review & Editing — M.T.P.; Visualization — M.T.P.; Supervision — M.T.P.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: C12, D81, G12, G41

Received: 26.09.2023
Accepted: 15.03.2024
Published online: 19.03.2024

How to cite this paper: Pham, M. T., & Do, P. T. (2024). The impact of overconfidence on stock market valuation: An empirical study on listed firms [Special issue]. Journal of Governance & Regulation, 13(1), 448–457. https://doi.org/10.22495/jgrv13i1siart17