Numerological superstition and earnings management: evidence from China

PurposeAn emerging line of research examining the role of numerological superstition in the capital market shows that it has significant impact on investor behavior (Bhattacharya, Kuo, Lin, & Zhao, 2018; Hirshleifer, Jian, & Zhang 2018). However, to the authors’ best knowledge, there is a dearth of evidence on whether numerological superstition affects corporate behavior. This study fills this void by examining the association between investors’ numerological superstition and earnings management using Chinese data.Design/methodology/approachChinese culture views 6 and 8 as lucky numbers. Using Chinese publicly traded firms, the authors examine the relation between investors’ numerological superstition and corporate financial reporting behavior.FindingsThe results suggest that firms reporting lucky earnings-per-share (EPS) numbers ending with 6 or 8 are more likely to engage in earnings management. These firms also raise more capital through seasoned equity offerings in the following year; however, they do not have more capital investments. Instead, their controlling shareholders siphon a significant amount of capital through related party transactions. Overall, the findings suggest that managers collude with controlling shareholders to manage earnings by exploiting the superstitious beliefs of minority shareholders.Originality/valueTo the authors’ best knowledge, there is a dearth of evidence on whether numerological superstition affects corporate behavior. This study fills this void by examining the association between investors’ numerological superstition and earnings management using Chinese data.