<p>This study contributes to the on-going studies on
behavioral finance by providing a case study on underreaction
and overreaction of firm stocks to firm valuation. We use the Model of Investor
Sentiment (Barberis et al., 2005) to evaluate underreaction and overreaction
behavior and reflect on specific findings in the Indonesian market. The result
of the study is most of the stocks in the Indonesian Stock Exchange are more
overreaction to the news of firm financial statements. Firms on the industry
with more intangible assets measure more overreaction than firms on industries
with more tangible assets. For stocks with
overreaction, the stock firm value is positively affected by a change in the total
assets and profitability, but not by change of book value. The result
concretized no evidence that firm stocks overreacted to the news more than
underreacting. In stock industrial sectors, the financial institutions and
wholesale industry stocks demonstrated remarkable overreactions. Nonetheless,
automotive, building construction, food and beverage as well as cement evidenced
more underreaction. For better return in financial markets, investors may buy
stocks of the firm on industry with more tangible assets when there is no good
news about the increasing firm
profitability and sales; nonetheless, they should buy stocks of the firm on
industry with more intangible assets when there is no lousy news about the increasing firm profitability and
sales. </p>
Analysis of the Limited Arbitrage based on Behavioral Finance