Overconfidence Bias and Firm Market Value: The Mediating Role of Stock Return Volatility – Evidence from the Nairobi Securities Exchange

Abstract

This study examines the effect of overconfidence bias on firm market value and the mediating role of stock return volatility in this relationship among firms listed on the Nairobi Securities Exchange (NSE) over the period 2016 - 2025. Despite growing evidence from developed markets, limited empirical research exists on the transmission mechanisms through which overconfidence bias influence firm valuation in frontier African markets. Using a panel dataset of 54 firms (537 firm-year observations) and employing fixed effects panel regression with bootstrap mediation analysis (5,000 resamples), the study finds that overconfidence bias has a positive and significant effect on firm market value. The study further establishes that stock return volatility significantly mediates the relationship between overconfidence bias and firm market value. The study contributes to behavioural finance literature by extending the mediation model to a frontier market context and revealing the transmission channel through which overconfidence bias affects firm market value. 

Keywords:       Overconfidence bias, stock return volatility, firm market value, mediation analysis, Nairobi Securities Exchange, behavioral finance, frontier markets