Constraining earnings management through heightened managerial risk perception: Evidence from zodiac-year belief

We leverage the Chinese zodiac-year belief to explore whether heightened managerial risk perception could constrain opportunistic earnings management. According to this belief, a person’s zodiac year is associated with misfortune, prompting greater risk-aversion in decision-making during that period. Building on this premise, we expect that CEOs are less inclined to engage in earnings manipulation in their zodiac years, as they perceive a higher likelihood of detection and more severe consequences if such manipulation is uncovered. This expectation rests on the assumption that the heightened ex ante risks perceived by CEOs for managing earnings would make their expected costs of doing so surpass the expected benefits. Drawing on a difference-in-differences research design and a sample of Chinese listed firms, we provide robust causal evidence that earnings management declines significantly during CEOs’ zodiac years relative to adjacent years. This effect is more evident among firms with greater business risk, those operating in regions where superstitious norms are more pervasive or whose CEOs were born in such regions, and among non-state-owned enterprises. Overall, our findings complement the literature on behavioral economics by highlighting the role of culturally embedded beliefs in deterring managerial opportunism.