The hypothesis of financial market efficiency predicts that the stock prices show instantaneously all the applicable information available on the market (Fama, 1970). If the market is efficient, and if the investors are neutral to the risk, then the stock prices are unpredictable. This paper studies the predictability of stock returns listed on the French stock market. The objective of this paper is to examine the nature of the phenomenon characterizing the behavior of the prices. It is about examining the phenomena of underreaction and overreaction on the French stock market during the period 1974-2004. If these two phenomena do not exist, then the stock prices follow a random walk. We adopt the methodology of De Bondt and Thaler (1985) for the construction of winning and losing portfolio and performed different econometric tests to study the phenomena of underreaction and overreaction. We find that the hypotheses of overreaction and underreaction are rarely significant. Therefore, we can say that the variation of stock returns is often unforeseeable which is based on the sets of ex post returns.

The hypothesis of market efficiency is extensively accepted in the modern financial theory to explain the asset prices. It supposes that the stock prices instantaneously reflect all the applicable information available in the market (Fama, 1991).

Fama (1970) defined an efficient market as the one in which investors compete to win information so that it is reflected completely in the asset prices. The different forms of efficiency depend on the type of information considered.

• Efficiency under its weak form supposes that the prices reflect the historical information included in the past prices. This information is available to all investors. Consequently, abnormal returns cannot exist.
• Efficiency under its semi-strong form supposes that the investors cannot beat the market, being based on the public information that exists on the market.
• Efficiency under its strong form stipulates that the prices reflect the private information which disposes the investors instantaneously and, in fact, they cannot achieve any abnormal returns, being based on their private information.

Behavioral Finance Journal, Initial Public Offering, Capital Structure Theory, Academic Literature, Mergers and Acquisitions, Financial Investors, Information Asymmetry, Institutional Investors, Discounted Cash Flow, Firm Valuation, Indian Markets, IPO Market.