A challenge to EMH is that individuals often overreact and underreact to news causing stock markets to react according to investor behaviour in their investment decision making. Generally, the study determined the effect of investor behaviour on stock market reaction of listed companies in Kenya. Specifically, the study determined the effect of investor herd behaviour on stock market reactions of listed companies in Kenya; determined the effect of investor loss aversion on stock market reactions of listed companies in Kenya; determined the effect of investor mental accounting on stock market reactions of listed companies in Kenya; and determined the effect of investor overconfidence on stock market reactions of listed companies in Kenya. The target population was 67 listed companies at the Nairobi Securities Exchange. A sample of 48 listed companies was used for analysis. Secondary data extracted from NSE historical data of listed companies for the period 2004 to 2016 was used for analysis. The study adopted quantitative research design. Panel data regression analysis model was used. The results indicated that herd behaviour did not have a significant effect on stock market reaction. However, loss aversion, mental accounting and overconfidence had significant effect on stock market reaction in Kenya.
