Abstract

After several decades of modern theory’s prevalence in the explication and elaboration of the investors’ performance based on such assumptions as investors’ rational behaviors and the theory of efficient market and due to the existence of unexplainable empirical evidences with the common models, the behavioral finance has made efforts to apply such knowledge as psychology, social sciences and anthropology to gain a better insight over the investors’ behaviors. The main objective of the current research paper is to evaluate the investors’ behaviors in response to the new profit forecasts declaration and then make use of Kahneman and Tversky’s prospect theory (Kahneman and Tversky, 1979) to find an answer to the question that whether the previously declared profits can be considered as a reference point or not? To do the research, the capital market behavior in respect to the profit declarations pertaining to each share released on the stock exchange market’s formal site for the time span between 2006 to 2011 was evaluated in a three-day period before and after releasing of the profit declarations based on serial regression method. The study method was based on the calculation of the companies’ return after the declaration of the profits and delineation of ascending and descending trends. In line with this, firstly the companies’ return was purified from the effect of any intervening variables and then the whole refined profits were collectively evaluated. The results indicate that the investors react differently to the ascending and descending variations of profit and their behaviors can be clarified and elucidated by the value function proposed by Kahneman and Tversky.