The Choice of Fiscal Year and the Earnings–Return Relationship

Abstract

The positive earnings-return relationship is weaker for US-listed firms with a calendar fiscal year. Furthermore, stock returns for these firms are more positively related to industry earnings, as a common fiscal year-end improves comparability of earnings. December fiscal year-ends are more frequent among large and low market-to-book industries and firms, consistent with firms trading off the benefits of better comparability against the associated higher accounting and auditing costs. Our results imply that the prevalence of a single standard for fiscal year-ends in other Asia-Pacific economies is indeed beneficial, as it promotes market transparency. This figure shows the percentage of firms in our sample with a December fiscal year-end (as measured by Compustat item FYR) as compared to the total number of all firms in our sample for the same year for each year during our sample period, 1983-2014.