The impact of superstition on managerial opportunism

Abstract

Managerial opportunism has detrimental effects on firms, investors, and the capital market, so it is important to curb such misbehavior. While prior studies primarily focus on the economic factors that shape managerial opportunism, there remains a limited understanding of how behavioral factors impact opportunistic behaviors. This thesis addresses this gap by exploring the role of superstitious belief, specifically the zodiac-year belief in China, in shaping managerial opportunistic behaviors. In Chinese culture, it is believed that zodiac year will bring bad luck to a person, and thus people tend to be more risk-averse, and more cautious about their decision-making and conduct, during their zodiac years. We utilize this belief as a unique setting to examine how managers make decisions regarding opportunistic actions when they are more risk-averse. To do this, we adopt the difference-in-differences research design and use samples of Chinese listed firms to compare the changes in managerial misconduct in CEOs’ zodiac years with the years before and after their zodiac year.
In Chapter 2, we investigate the impact of zodiac-year belief on earnings management. We expect that CEOs are less likely to manipulate earnings in their zodiac years for fear that the manipulation is more likely to detect and that the adverse consequences of the unveiled manipulation are likely to be more material. Such an expectation is on condition that the heightened ex ante risks perceived by CEOs for managing earnings would make their expected costs of doing so surpass the expected benefits. Our empirical analysis provides robust evidence that firms exhibit a lower magnitude of earnings management in the CEOs’ zodiac years compared to the years before and after the zodiac years. We also find that the zodiac-year effect on earnings management is more pronounced for firms with high business risk, firms headquartered in regions with a high degree of superstition, firms whose CEOs were born in highly superstitious regions, and non-state-owned firms.
In Chapter 3, we examine how zodiac-year belief affects corporate tax avoidance. Tax avoidance entails reputational risk and legal risk but will benefit the firm by reducing the risk of financial constraints or distress. The zodiac-year belief provides a nice setting for us to understand how CEOs trade off these risks. We find evidence that firms exhibit a greater magnitude of tax avoidance in the CEOs’ zodiac years. We also find that the zodiac-year effect on corporate tax avoidance is stronger for firms with tight financial constraints, firms with high business risk, firms headquartered in regions with a high degree of superstition, and non-state-owned firms. Our results suggest that, when CEOs are more risk-averse, they attach more importance to financial risk than the risk of reputational losses and litigation associated with corporate tax avoidance.
In Chapter 4, I leverage the zodiac-year belief to examine whether insider trading could be restrained by increasing risk aversion of managers. I hypothesize that managers in their zodiac years are less inclined to engage in insider trading, as they perceive the risks of reputational losses and litigation to likely outweigh the potential benefits of the trades. The empirical results show that CEOs sell fewer stocks in their zodiac years, suggesting that heightened risk aversion, driven by zodiac-year belief, helps curb insider trading. I find this effect to be more pronounced in firms with higher financial reporting quality, stronger corporate governance, and among CEOs more susceptible to the zodiac-year belief.
Overall, this thesis contributes to the literature on behavioural economics of accounting and finance by providing compelling evidence on the role of superstitious belief in shaping managerial opportunistic decision-making. The seemingly conflicting findings can be attributed to the differences in regulatory deterrence and enforcement levels. Managers tend to be more concerned about the negative consequences of earnings management and insider trading due to stricter regulatory enforcement, whereas the relatively weak tax enforcement in China makes managers more likely to engage in corporate tax avoidance. The findings suggest that to effectively curb managerial opportunism, it is necessary to strengthen regulatory deterrence and raise managerial awareness of the legal and reputational risks associated with opportunistic conduct.