Stock Market Hype: An Empirical Investigation of the Impact of Overconfidence on Meme Stock Valuation

Richard Mawulawoe Ahadzie (), Peterson Owusu Junior, John Kingsley Woode and Dan Daugaard
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Richard Mawulawoe Ahadzie: Tasmanian School of Business and Economics, University of Tasmania, Private Bag 84, Hobart 7001, TAS, Australia
Peterson Owusu Junior: Department of Finance, School of Business, University of Cape Coast, Cape Coast 00233, Ghana
John Kingsley Woode: Department of Finance, School of Business, University of Cape Coast, Cape Coast 00233, Ghana
Dan Daugaard: Tasmanian School of Business and Economics, University of Tasmania, Private Bag 84, Hobart 7001, TAS, Australia

Risks, 2025, vol. 13, issue 7, 1-21

Abstract: This study investigates the relationship between overconfidence and meme stock valuation, drawing on panel data from 28 meme stocks listed from 2019 to 2024. The analysis incorporates key financial indicators, including Tobin’s Q ratio, market capitalization, return on assets, leverage, and volatility. A range of overconfidence proxies is employed, including changes in trading volume, turnover rate, changes in outstanding shares, and alternative measures of excessive trading. We observe a significant positive relationship between overconfidence (as measured by changes in trading volume) and firm valuation, suggesting that investor biases contribute to notable pricing distortions. Leverage has a significant negative relationship with firm valuation. In contrast, market capitalization has a significant positive relationship with firm valuation, implying that meme stock investors respond to both speculative sentiment and traditional firm fundamentals. Robustness checks using alternative proxies reveal that turnover rate and changes in the number of shares are negatively related to valuation. This shows the complex dynamics of meme stocks, where psychological factors intersect with firm-specific indicators. However, results from a dynamic panel model estimated using the Dynamic System Generalized Method of Moments (GMM) show that the turnover rate has a significantly positive relationship with firm valuation. These results offer valuable insights into the pricing behavior of meme stocks, revealing how investor sentiment impacts periodic valuation adjustments in speculative markets.

Keywords: overconfidence; stock valuation; speculative markets; meme stocks; behavioral bias (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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