Ending at the Wrong Time: The Financial Reporting Consequences of a Uniform Fiscal Year-End

Abstract

There is an ongoing debate over uniformity versus flexibility in accounting regulation. This study examines the financial reporting consequences of a rigid accounting rule in China under which the fiscal year-end is uniform for all companies. Using extensive interviews together with large-sample archival analyses, we find that “mismatched” firms—those whose mandated financial reporting cycles are not aligned with their business cycles—exhibit higher levels of absolute abnormal accruals than their non-mismatched counterparts. Further analyses suggest that the negative association between mismatching and financial reporting quality is mainly driven by unintentional estimation errors rather than intentional earnings manipulation.

Accentuate the positive? Strategic negativity amid the hazard of high expectations

“…Our empirical models focus on specific examples of each condition-(1) a positive material earnings surprise and (2) the turn of a fiscal year (Q4 and Q1). In contexts where firms are free to determine their own fiscal year-end based on their business cycle, the turn of a new fiscal year is a natural expectation-updating juncture, as investors often use this business cycle to take stock of the value of their holdings (Li et al, 2023). We note that positive news essentially gives stakeholders the motive to update their expectations, while a new fiscal year gives them a perceived opportunity to do so.…”