Restricting insider trading through increasing managerial risk aversion – A behavioral mechanism

We leverage the Chinese zodiac-year belief to examine whether insider trading could be restrained by increasing risk aversion of managers. According to the zodiac-year belief, individuals perceive themselves as more vulnerable to misfortune during their zodiac years, leading to greater caution and risk-aversion in decision-making. On this basis, we hypothesize that managers are less inclined to engage in insider trading during their zodiac years, as they perceive the risks of reputational damage and litigation to likely outweigh the potential benefits of the trades. Using a stacked difference-in-differences research design, we provide causal evidence that CEOs sell fewer stocks in their zodiac years, suggesting that heightened risk aversion, driven by the zodiac-year belief, helps curb insider trading. We 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 — particularly in the presence of elevated firm-level business risk and high region-level superstition. Our findings highlight a behavioral disciplinary mechanism, complementing traditional governance measures, to constrain insider trading and enhance market integrity and fairness.