Not logged in.
Quick Search - Contribution
Contribution Details
| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Superstition, Earnings Announcements and the Chinese Stock Market |
| Organization Unit | |
| Authors |
|
| Supervisors |
|
| Language |
|
| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 72 |
| Date | 2021 |
| Zusammenfassung | To achieve success, there is an old Chinese adage that says 70% relies on your hard work, 30% relies on your luck” (Keegan, 2020). Under Chinese culture, although luck is presumed to determine at least to some extent life outcomes, it is also believed that having a personal connection to an auspicious object or performing an auspicious ritual can boost one’s personal luck (Hirshleifer et al., 2018). A specific type of Chinese superstition, numerology, or the belief that particular numbers represent good or bad luck, stems from the similarity in sounds between certain numbers and words in Chinese. This resemblance in pronunciation of particular words is believed to give these numbers auspicious or inauspicious properties. For example, the number four is associated with bad luck as its pronunciation in Mandarin is similar to the word for ‘death’ (Chung et al., 2014). On the other hand, Chinese people believe the numbers six, eight, and nine are particularly auspicious because they sound similar to the word for ‘success’, ‘wealth’, and ‘for a long time’, respectively (Chung et al., 2014; Huang & Teng, 2009; Hirshleifer et al., 2018). Renowned anthropologist Bronisław Malinowski (1948) argued that superstitious beliefs, including numerology, comfort individuals in the choices they make, and as such act as a heuristic for decisionmaking in uncertain situations. His argument has been supported by previous literature on the effect of Chinese numerology on the decisions of Chinese individuals in various uncertain contexts (see e.g. Block & Kramer, 2009). Of particular interest is the impact that these beliefs have on financial markets, whose future returns are intrinsically uncertain. Although few studies have investigated the effect of Chinese numerological superstitions on the prices of various assets by individual Chinese investors, they have shown that these superstitions play a significant role in these investors’ investment decisions (Hirshleifer et al., 2018; Shum et al., 2014). Despite rising interest in the literature on the relationship between Chinese superstitions and various financial markets, little attention has been given to company earnings announcements. As earnings reports appear to be an important source of public information for Chinese investors and considerably affect their investment selection (see Huang & Li, 2014), they are a potential important vehicle through which irrational investment behaviour arises on the Chinese stock market. As particular numbers become predictors of future company performance under Chinese numerology, such superstitions can permeate the stock market through a strong preference by investors for stocks of firms who announced earnings perceived as lucky relative to those whose earnings are labelled as unlucky. Although reported earnings are value relevant to Chinese investors, their overall quality has been questioned by academics as earnings management practices are widespread, in particular among certain listed Chinese firms (see e.g. Liu & Lu, 2007; Jian & Wong, 2003). Although Chinese investors cannot spot individual cases of earnings management as they lack necessary knowledge (see e.g. Jiang et al., 2020), past research suggests that they have some level of awareness of the type of firms that are most likely to engage in such practices as they discount such firms’ accounting information due to suspicions of earnings management (Jian & Wong, 2003; Lento & Yeung, 2017). For these firms, the good and bad luck signals embedded in their fabricated earnings may appear as less trustworthy, and as such lose its appeal as a predictor of future corporate performance in the eye of superstitious Chinese investors. It is apparent from the existing literature and theoretical arguments that the question of whether Chinese numerological superstitions affect Chinese investors’ stock investment behaviour upon earnings releases and how exactly it occurs are yet to be determined. The purpose of this paper is to address this gap in the literature by testing the relationship between the luck associated with reported earnings per share (EPS) under Chinese numerological superstition and the firms’ stock returns around earnings releases. Further, whether the effect of numerological superstitions on stock returns is dependent on the investors’ perception of the reported earnings’ quality is also investigated. In order to test the formulated hypotheses, data from the China Stock Market & Accounting Research database are utilised. Following the event study methodology, the analysis is conducted on annual EPS announcements for A-shares of Chinese firms that are listed on the Shanghai and Shenzhen Stock Exchanges between 2008 and 2020. The results found in this paper indicate that Chinese numerological superstitions do influence stock investment decisions of Chinese investors upon annual earnings announcements. However, this influence is most prevalent when factual information, the reported earnings figures themselves, are not deemed reliable by investors. Although none of the hypotheses outlined in this paper were supported by the empirical results, superstition still appears to act as an uncertainty mitigator and a heuristic for decision-making, indicating that superstition plays a role in investment decisions by retail Chinese investors. The reported performance for firms that are most likely to engage in earnings management seems to raise suspicions among Chinese investors about the quality and trustworthiness of the accounting numbers. However, as they lack general accounting or financial analysis knowledge to determine whether a firm suspected of managing its earnings does engage in such practices, they appear to rely on numerological superstition to assess the quality of these firms’ reported earnings in order to make investment decisions. Further, Chinese investors seem to exhibit a preference for stocks with unlucky reported EPS relative to those with auspicious EPS. A potential explanation for such finding is that lucky EPS raise investors’ suspicion about the quality of the reported accounting earnings as they believe firm managers also fall under the influence of Chinese numerological superstitions when preparing financial statements. The findings of this paper have implications not only for current and potential investors in the Chinese stock market, but also for Chinese regulatory bodies. Past research has highlighted the need to educate Chinese investors on investment knowledge and skills (e.g. Wang et al., 2006). The proven influence of superstition on Chinese investors’ investment decisions shows that additional efforts in this area are necessary, for example through better education of new investors by relevant Chinese authorities and financial institutions. Further, the findings also suggest that there is a general distrust of financial data from particular firms among Chinese investors such as state-owned firms. It is therefore important for the future development of the Chinese stock market to foster increased trust in the quality of reported financial information in China by mitigating the currently strong incentives for government officials to overstate the financial performance of such firms. Further, the results in this paper highlight the importance for investors to be wary when investing in the Chinese stock market not only given the established prevalence of earnings management practises and its erratic returns, but the widespread superstitious and irrational behaviours among domestic retail investors. |
| Export |
BibTeX
|