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Firms' fiscal years, size and industry
Economics Letters 29 (1989) 69-75 North-Holland
69
FIRMS’ FISCAL YEARS, SIZE AND INDUSTRY Gur HUBERMAN Tel Aviv Unioersi~,
Tel Aviv, Israel
Shmuel KANDEL university
of Chicago, Chicago, IL 60637, USA
Received 1 August 1988 Accepted 11 October 1988
Most U.S. corporations choose their fiscal years to coincide with the calendar year. We document that the larger the firm, the more likely it is to begin its fiscal year in January. This finding holds across industries.
1. Introduction The organization of firms employs an annual cycle, the fiscal year. A firm is usually free to choose the starting date of its fiscal year. Foster (1986) reports that most firms in the U.S. choose the calendar year to coincide with their fiscal years. That the majority of firms choose their fiscal years to coincide is puzzling. The clustering of fiscal year ends creates a strong demand for the services of auditors and accountants around the cluster, thereby rendering them more expensive at that time. If indeed these services are more expensive around the turn of the calendar year, firms are induced to deviate from the (perhaps) natural coincidence of the fiscal and calendar year. Which are the firms that deviate from the rule? We sort firms by size and industry and study the choices of fiscal year ends. The sorting by industry seems natural, especially once we recall that the seasonalities characterizing the activities in some industries (e.g., retailers, food processors) may induce deviations from the standard coincidence of the fiscal and calendar year. The sorting by firm size is inspired by the accumulating evidence that firm size is a major determinant of stock returns. [The literature is too vast to be surveyed here; suffice it to mention Banz (1981), who shows that small firms’ stocks have higher expected returns than large firms’ stocks; Huberman, Kandel and Karolyi (1987), who show that the return on stocks on firms of a similar size are more correlated with each other than with those on stocks of firms of different sizes; and Fama and French (1988), who show that the tendency of stock returns to be mean reverting is stronger the smaller the firm.] Documenting patterns in the choice of fiscal years is a contribution to the empirical evidence on the organization of the firm. In addition, it has implications for studies which relate stock returns to accounting variables. By and large, these studies sort firms by fiscal year ends, and either consider only firms whose fiscal years coincide with the calendar year or report the results separately for firms with different fiscal years. The present work highlights the difficulties in interpreting the results of such studies, as fiscal years and other variables (especially firm size) are closely related. 0165-1765/89/$3.50
0 1989, Elsevier Science Publishers B.V. (North-Holland)
G. Huberman,
70
S. Kandel / Firms’jiscal
years,
size and industry
Section 2 documents that large firms are more likely than small firms to end their fiscal years on December 31. The fraction of firms which choose the calendar year to coincide with their fiscal years varies across industries. Within most industries, however, large more than small firms tend to choose January 1 as the beginning of their fiscal years. Section 3 relates this paper’s results to other studies and section 4 summarizes the paper. 2. The empirical
regularities
The empirical regularities reported in this section are based on data for the years 1965 to 1984 taken from COMPUSTAT and CRSP tapes. The firms studied here satisfy the following selection criteria: (1) Their equity is traded on the New York Stock Exchange or on the American Stock Exchange (NYSE or ASE). (2) Accounting data about them are available on the COMPUSTAT tape. (3) They belong to one of 19 industry groups. A total of 2,834 firms satisfy our selection criteria. The 19 industry groups are based on the firms’ Standard Industrial Codes (SIC) and described in table 1. Annual sorting of firms by market capitalization is derived from CRSP tapes. It is done (into deciles) for the whole sample and (into halves) for each industry. The smallest firms are in decile number 1, the largest in decile number 10, etc. 2.1.
Firm size and the beginning of the fiscal year
Most firms end their fiscal years on the 31st of December. Do small and large firms behave differently in choosing their fiscal year ends? Table 2 indicates that the answer is an emphatic yes. The larger the firm, the more likely it is to end its fiscal year at the end of the calendar year.
Table 1 The 19 industry groups based on firms’ Standard Industrial Codes (SIC). Industry
Code(s)
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.
(SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC
Mining Food Textiles Paper products Chemical Petroleum Stone, Clay, Glass Primary metals Fabricated metal Machinery Appliances Transportation equipment Miscelaneous manufacturing Railroads Other transportation Utilities Department stores Other retail Banking, finance
lOOc-1499) 2000-2099) 2200-2399) 2600-2699) 2800-2899) 2900-2999) 3200-3299) 3300-3399) 3400-3499) 3500-3599) 3600-3699) 3700-3799) 3800-3899) 4000-4999) 4100-4299, 440&4599,4700-4799) 4900-4999) 5300-5399) 500&5299,540@5999) 6000-6799)
G. Hubermon, Table
S. Kandel / Firms’ fiscal years, size and industry
71
2
The relation between Decile
firm size and fiscal year end over the year 1966-1985.
a Total
Month 1
2
3
4
5
6
I
8
9
10
11
12 3181
1
0.08
0.04
0.05
0.11
0.03
0.07
0.03
0.41
2
0.07
0.04
0.06
0.10
0.02
0.08
0.03
0.48
3254
3
0.05
0.03
0.04
0.10
0.02
0.07
0.03
0.50
3270
4
0.06
0.03
0.04
0.09
0.03
0.08
0.04
0.51
3364
5
0.05
0.02
0.04
0.09
0.02
0.07
0.04
0.54
3462
6
0.04
0.02
0.04
0.08
0.02
0.06
0.02
0.61
3561
7
0.03
0.02
0.04
0.06
0.03
0.06
0.02
0.65
3651
8
0.04
0.01
0.03
0.07
0.03
0.07
0.02
0.67
3830
9
0.04
0.01
0.01
0.05
0.02
0.04
0.01
0.75
3912
10
0.03
0.01
0.01
0.03
0.00
0.03
0.01
0.83
4105
Total
0.05
0.02
0.08
0.02
0.06
0.02
0.61
35632
a The (i, j)th
element is the average fraction
The last column
provides
the total number
of the firms in the i th size decile which end their fiscal years in the jth of observations
in the corresponding
month.
decile.
Less than 50% of the firms in the lowest size sorted decile end their fiscal years at the calendar year’s end, whereas more than 80% of the firms in the highest decile end their fiscal years on December 31. Overall, 61% of the firms choose December 31 as the end of their fiscal years. The second most popular choice is the end of June (8%).
Table
3
The relation between Industry
industry
and fiscal year end over the years 1966-1985.
a
Month
Total
1
2
3
4
6
I
8
9
10
11
12
1.
0.02
0.00
0.01
0.02
0.02
0.08
0.02
0.01
0.07
0.01
0.01
0.73
2994
2.
0.01
0.05
0.07
0.05
0.08
0.13
0.05
0.04
0.05
0.07
0.01
0.40
2240
3.
0.08
0.03
0.02
0.04
0.04
0.08
0.04
0.03
0.08
0.07
0.07
0.40
2161
4.
0.00
0.02
0.02
0.02
0.00
0.04
0.01
0.00
0.03
0.04
0.01
0.81
914
5.
0.00
0.02
0.04
0.02
0.00
0.10
0.01
0.02
0.04
0.01
0.02
0.71
2503
6.
0.00
0.00
0.02
0.00
0.00
0.04
0.02
0.01
0.07
0.00
0.00
0.84
1019
I.
0.02
0.03
0.00
0.00
0.04
0.04
0.00
0.00
0.04
0.02
0.02
0.79
835
8.
0.03
0.00
0.01
0.04
0.00
0.07
0.04
0.00
0.06
0.01
0.02
0.70
1365 1809
9.
0.04
0.02
0.05
0.00
0.01
0.12
0.03
0.02
0.05
0.03
0.03
0.60
10.
0.01
0.01
0.02
0.04
0.01
0.08
0.04
0.01
0.07
0.08
0.06
0.58
2977
11.
0.01
0.03
0.08
0.03
0.02
0.13
0.04
0.02
0.08
0.03
0.01
0.51
4640
12.
0.00
0.01
0.03
0.05
0.01
0.08
0.06
0.06
0.11
0.03
0.02
0.53
1942
13.
0.06
0.01
0.07
0.04
0.03
0.06
0.03
0.02
0.08
0.03
0.03
0.54
2338
14.
0.00
0.00
0.00
0.02
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.98
275
15.
0.00
0.00
0.04
0.00
0.01
0.08
0.03
0.00
0.03
0.02
0.00
0.80
1170
16.
0.00
0.00
0.02
0.00
0.00
0.00
0.01
0.02
0.05
0.01
0.00
0.89
3292
17.
0.69
0.00
0.00
0.01
0.00
0.04
0.09
0.03
0.01
0.00
0.00
0.13
903
18.
0.15
0.05
0.07
0.04
0.03
0.11
0.06
0.04
0.06
0.03
0.02
0.33
5038
19.
0.02
0.03
0.02
0.02
0.02
0.05
0.02
0.02
0.06
0.04
0.04
0.67
4708
a The (i, j)th column
element is the fraction
provides
the total number
of the first in the ith industry of observations
which end their fiscal years in the jth
in the corresponding
industry.
month.
The last
72
G. Hubertnan,
S. Kandel / Firms’jiscal
years,
sire and industry
Table 4 The relation, within each industry, between Industry 1
Large
Total
860
1492
2352
0.62
0.84
0.76
0.66
0.86
0.76
1043
1871
0.40
0.39
0.39
0.39
0.39
0.39
1264
541
1805
0.40
0.46
0.42
0.43
0.41
0.42
249
550
799
0.68
0.85
0.80
0.75
0.85
0.80
707
1540
2247
0.64
0.77
0.73
0.65
0.81
0.73
114
835
949
0.54
0.89
0.85
0.72
0.97
0.85
344
8
a
Small
828
2
firm size and fiscal year end over the years 1966-1985.
431
775
0.65
0.96
0.82
0.68
0.97
0.82
599
660
1259
8
0.61
0.80
0.71
8
0.60
0.81
0.71
9
992
529
1521
9
0.50
0.80
0.60
9
0.49
0.72
0.60
10
1255
1220
2475
10
0.59
0.61
0.60
10
0.59
0.61
0.60
11
1947
1675
3622
11
0.50
0.62
0.55
11
0.50
0.61
0.55
12
797
919
1716
12
0.40
0.67
0.54
12
0.42
0.67
0.54
13
1056
814
1870
13
0.44
0.71
0.56
13
0.42
0.69
0.56
14
24
174
198
14
0.88
1.00
0.98
14
0.97
1.00
0.98
15
484
513
997
15
0.79
0.80
0.79
15
0.80
0.79
0.79
G. Huberman, S. Kandel / Firms’ fiscal years, size and industry
73
Table 4 (continued) Small
Industry 16
396
Large
Total
2492
2888
16
0.80
0.92
0.90
16
0.86
0.95
0.90
17
408
379
784
17
0.13
0.11
0.12
17
0.14
0.11
0.12
18
2496
1496
3992
18
0.33
0.37
0.34
18
0.33
0.36
0.34
19
1710
1799
3509
19
0.48
0.80
0.64
19
0.48
0.80
0.64
0.49
0.71
0.54
0.67
Total
’ Two size classifications size-median average
number
fractions
are used. The first uses the population
within the industry
as the cut-off
of small and large
between
firms according
of small and large firms, according
wide size-median
as the cut-off
small and large firms. For each industry, to the first classification.
The second
to the first and second classification,
and the second
uses the
the first row provides
the
and third rows provide
the
whose fiscal year ends are in December.
We consider separately the 545 firms which satisfy the first two selection criteria but do not fall into one of the 19 industry categories. They tend to be smaller than those belonging to one of the industries, firms. 2.2.
but the systematic
Industry
relation
between
firm size and fiscal year end holds also for these 545
and the fiscal year end
Firms in industries with seasonal activities tend to choose their fiscal year ends at the time when their inventories are lowest. For instance, department stores are likely to close their book at the end of January. In table 3 we report the average (over the 20 years 196551984) choice of year end for firms in the 19 different industry categories. In table 4 we report the average fractions of small and large firms within each industry
which choose
December
31 as their fiscal year ends. The distinction
between large and small firms is based on sorting within industries and on the sample-wide sorting. The latter affords a look at the relation between size and industry. [For other relations between firm size and industry, see also Huberman, Kandel and Karolyi (1987). They classify stocks according to size and industry and study covariations of stock returns.] In most industries, more than 50% of the firms end their exceptions are
fiscal
years
on December
31. The
(1) Department stores. 69% of the firms in this category close their books on January 31. Only 13% of them end the fiscal year in December. The size distribution of the firms in this industry group resembles that of the whole population. (2) Other retail. Only 33% of the firms in this category end the fiscal year in December. The other frequent months are January (15%) and June (11 W). The firms in this group tend to be smaller than the firms in the whole population.
G. Huberman, S. Kandel / Fwms’fiscal
74
years, size and industg.
(3) Food. 40% of the firms in this category close their books in December. The other frequent months are June (13%) and May (8%). The firms in this group tend to be larger than the firms in the whole population. (4) Textiles. Firms in this category tend to close their books, if not in December (40%) then in January, June or September (8% each). They tend to be smaller than the first in the whole population. Tables 3 and 4 give the impression the pattern evident from table 2.
that industry
induced
choice
of fiscal year end is not behind
3. Relations to other studies in accounting and finance In this section we relate the results reported in section 2 to other studies in finance and accounting. Banz (1981) Reinganum (1981) and Keim (1983a, b) report that average returns on small firms’ stocks are higher than those on large firms’ stocks, especially in January. An interesting question is whether the empirical regularities in these papers are directly related to those reported here. Keim (1983a, b) provides a negative answer. He finds no relation between the size related difference in returns and the end of the fiscal year. In other words, once he controls for firm size, he cannot use fiscal year end to explain differences in average stock returns. Foster (1986) points out that across countries there is a great diversity in firms’ fiscal year ends. He cautions that such diversity may affect cross corporate comparisons if they are based on the corporations’ annual reports. This study shows that restricting a sample to firms whose fiscal years end on December 31 [see, e.g., Bushan (1986)] may induce a sample biased to have large firms. Beaver (1968) considers .NYSE firms whose fiscal year ends do not coincide with the calendar year’s end. He documents stock price reactions to annual earnings announcements. considers NYSE firms but includes firms which end their fiscal year on December stock price reactions reactions to earnings seeming
contradiction
to the annual earnings announcements. announcements are stronger for small between
Beaver
(1968)
and Grant
(1980)
Grant (1980) also 31. He fails to find
Atiase (1987) documents that price than for large firms. To settle the he conjectures
that ‘Beaver
(1968)
may have studied a sample of relatively small or average size Exchange firms while Grant (1980) may have studied a sample of relatively large firms’. This paper confirms that, on average, smaller firms appear in Beaver’s
sample than in Grant’s.
4. Summary and conclusions This paper documents a positive relation between a firm’s size and its likelihood to end its year with the calendar year. This positive relation is common across industries. It holds for whose stocks have been listed on NYSE or ASE for a while as well as for new comers to markets. Unfortunately, the data at hand do not reveal the dynamics which lead to this sectional pattern. Firms’ choice to coordinate
fiscal firms these cross
the ends of their fiscal years is puzzling. The turn of the fiscal year is a
period of intensive auditing and planning activities. These activities require employment of resources outside the firm. Contemporaneous employment of these resources by many firms implies seasonally high costs and an incentive for firms to choose different times to end their fiscal years. Why then do most firms end their fiscal years with the calendar year and why the systematic deviations from this regularity?
G. Hubermnn, S. Kandel / Firms’Jiscal years, size and industry
15
References Atiase,
Rowland
Accounting Banz,
Rolf,
March, Beaver,
1981,
William
Bushan,
1987,
Market
implications
of predisclosure
information:
Size and exchange
effects,
Journal
of
of Financial
Economics
9,
Research
in Accounting:
forthcoming.
The relationship
between
return
and market
content
of annual
value of common
stocks,
Journal
3-18.
Selected
H., 1968,
Studies
Ravi,
The information
earnings
announcements,
Empirical
67-100.
Collection
(University
Eugene
Economy
1968,
1986,
dissertation Fama,
Kwame, Research,
of information
of Chicago,
F. and Kenneth
about
Chicago,
R. French,
publicly
traded
firms:
Theory
and
evidence,
Unpublished
Ph.D.
IL).
1988,
Permanent
and temporary
components
of stock returns,
Journal
of Political
96, no. 2, 246-273.
Foster,
George,
Grant,
Edward
1986,
Financial
statement
B., 1980, Market
analysis,
implications
second
ed. (Prentice-Hall,
of differential
amounts
of interim
Englewood
Cliffs,
information,
NJ).
Journal
of Accounting
Research
18, 255-268. Huberman,
Gur, 1988,
Huberman,
Gur,
Optimality
Shmuel
Kandel
of periodicity, and Andrew
Review Karolyi,
paper no. 202 (Center for Research in Security Keim, Donald B., 1983a, The interrelation between January returns, Keim, Donald B., Financial Reinganum, market
Unpublished Ph.D. 1983b, Size-related
Economics Mark
R.,
dissertation anomalies
of Economic 1987,
Studies
Size and industry
60, 127-138. related
covaration
Prices, University of Chicago, Chicago, IL). dividend yields, equity values, and stock returns: (University of Chicago, Chicago, 1L). and stock market seasonality: Further
of stock
returns,
Implications
empirical
evidence,
Working
of abnormal Journal
of
12, 13-32. 1981,
values, Journal
Misspecification
of Financial
of capital
Economics
asset
9, March,
pricing:
19-46.
Empirical
anomalies
based
on earning’s
yields
and
69
FIRMS’ FISCAL YEARS, SIZE AND INDUSTRY Gur HUBERMAN Tel Aviv Unioersi~,
Tel Aviv, Israel
Shmuel KANDEL university
of Chicago, Chicago, IL 60637, USA
Received 1 August 1988 Accepted 11 October 1988
Most U.S. corporations choose their fiscal years to coincide with the calendar year. We document that the larger the firm, the more likely it is to begin its fiscal year in January. This finding holds across industries.
1. Introduction The organization of firms employs an annual cycle, the fiscal year. A firm is usually free to choose the starting date of its fiscal year. Foster (1986) reports that most firms in the U.S. choose the calendar year to coincide with their fiscal years. That the majority of firms choose their fiscal years to coincide is puzzling. The clustering of fiscal year ends creates a strong demand for the services of auditors and accountants around the cluster, thereby rendering them more expensive at that time. If indeed these services are more expensive around the turn of the calendar year, firms are induced to deviate from the (perhaps) natural coincidence of the fiscal and calendar year. Which are the firms that deviate from the rule? We sort firms by size and industry and study the choices of fiscal year ends. The sorting by industry seems natural, especially once we recall that the seasonalities characterizing the activities in some industries (e.g., retailers, food processors) may induce deviations from the standard coincidence of the fiscal and calendar year. The sorting by firm size is inspired by the accumulating evidence that firm size is a major determinant of stock returns. [The literature is too vast to be surveyed here; suffice it to mention Banz (1981), who shows that small firms’ stocks have higher expected returns than large firms’ stocks; Huberman, Kandel and Karolyi (1987), who show that the return on stocks on firms of a similar size are more correlated with each other than with those on stocks of firms of different sizes; and Fama and French (1988), who show that the tendency of stock returns to be mean reverting is stronger the smaller the firm.] Documenting patterns in the choice of fiscal years is a contribution to the empirical evidence on the organization of the firm. In addition, it has implications for studies which relate stock returns to accounting variables. By and large, these studies sort firms by fiscal year ends, and either consider only firms whose fiscal years coincide with the calendar year or report the results separately for firms with different fiscal years. The present work highlights the difficulties in interpreting the results of such studies, as fiscal years and other variables (especially firm size) are closely related. 0165-1765/89/$3.50
0 1989, Elsevier Science Publishers B.V. (North-Holland)
G. Huberman,
70
S. Kandel / Firms’jiscal
years,
size and industry
Section 2 documents that large firms are more likely than small firms to end their fiscal years on December 31. The fraction of firms which choose the calendar year to coincide with their fiscal years varies across industries. Within most industries, however, large more than small firms tend to choose January 1 as the beginning of their fiscal years. Section 3 relates this paper’s results to other studies and section 4 summarizes the paper. 2. The empirical
regularities
The empirical regularities reported in this section are based on data for the years 1965 to 1984 taken from COMPUSTAT and CRSP tapes. The firms studied here satisfy the following selection criteria: (1) Their equity is traded on the New York Stock Exchange or on the American Stock Exchange (NYSE or ASE). (2) Accounting data about them are available on the COMPUSTAT tape. (3) They belong to one of 19 industry groups. A total of 2,834 firms satisfy our selection criteria. The 19 industry groups are based on the firms’ Standard Industrial Codes (SIC) and described in table 1. Annual sorting of firms by market capitalization is derived from CRSP tapes. It is done (into deciles) for the whole sample and (into halves) for each industry. The smallest firms are in decile number 1, the largest in decile number 10, etc. 2.1.
Firm size and the beginning of the fiscal year
Most firms end their fiscal years on the 31st of December. Do small and large firms behave differently in choosing their fiscal year ends? Table 2 indicates that the answer is an emphatic yes. The larger the firm, the more likely it is to end its fiscal year at the end of the calendar year.
Table 1 The 19 industry groups based on firms’ Standard Industrial Codes (SIC). Industry
Code(s)
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.
(SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC (SIC
Mining Food Textiles Paper products Chemical Petroleum Stone, Clay, Glass Primary metals Fabricated metal Machinery Appliances Transportation equipment Miscelaneous manufacturing Railroads Other transportation Utilities Department stores Other retail Banking, finance
lOOc-1499) 2000-2099) 2200-2399) 2600-2699) 2800-2899) 2900-2999) 3200-3299) 3300-3399) 3400-3499) 3500-3599) 3600-3699) 3700-3799) 3800-3899) 4000-4999) 4100-4299, 440&4599,4700-4799) 4900-4999) 5300-5399) 500&5299,540@5999) 6000-6799)
G. Hubermon, Table
S. Kandel / Firms’ fiscal years, size and industry
71
2
The relation between Decile
firm size and fiscal year end over the year 1966-1985.
a Total
Month 1
2
3
4
5
6
I
8
9
10
11
12 3181
1
0.08
0.04
0.05
0.11
0.03
0.07
0.03
0.41
2
0.07
0.04
0.06
0.10
0.02
0.08
0.03
0.48
3254
3
0.05
0.03
0.04
0.10
0.02
0.07
0.03
0.50
3270
4
0.06
0.03
0.04
0.09
0.03
0.08
0.04
0.51
3364
5
0.05
0.02
0.04
0.09
0.02
0.07
0.04
0.54
3462
6
0.04
0.02
0.04
0.08
0.02
0.06
0.02
0.61
3561
7
0.03
0.02
0.04
0.06
0.03
0.06
0.02
0.65
3651
8
0.04
0.01
0.03
0.07
0.03
0.07
0.02
0.67
3830
9
0.04
0.01
0.01
0.05
0.02
0.04
0.01
0.75
3912
10
0.03
0.01
0.01
0.03
0.00
0.03
0.01
0.83
4105
Total
0.05
0.02
0.08
0.02
0.06
0.02
0.61
35632
a The (i, j)th
element is the average fraction
The last column
provides
the total number
of the firms in the i th size decile which end their fiscal years in the jth of observations
in the corresponding
month.
decile.
Less than 50% of the firms in the lowest size sorted decile end their fiscal years at the calendar year’s end, whereas more than 80% of the firms in the highest decile end their fiscal years on December 31. Overall, 61% of the firms choose December 31 as the end of their fiscal years. The second most popular choice is the end of June (8%).
Table
3
The relation between Industry
industry
and fiscal year end over the years 1966-1985.
a
Month
Total
1
2
3
4
6
I
8
9
10
11
12
1.
0.02
0.00
0.01
0.02
0.02
0.08
0.02
0.01
0.07
0.01
0.01
0.73
2994
2.
0.01
0.05
0.07
0.05
0.08
0.13
0.05
0.04
0.05
0.07
0.01
0.40
2240
3.
0.08
0.03
0.02
0.04
0.04
0.08
0.04
0.03
0.08
0.07
0.07
0.40
2161
4.
0.00
0.02
0.02
0.02
0.00
0.04
0.01
0.00
0.03
0.04
0.01
0.81
914
5.
0.00
0.02
0.04
0.02
0.00
0.10
0.01
0.02
0.04
0.01
0.02
0.71
2503
6.
0.00
0.00
0.02
0.00
0.00
0.04
0.02
0.01
0.07
0.00
0.00
0.84
1019
I.
0.02
0.03
0.00
0.00
0.04
0.04
0.00
0.00
0.04
0.02
0.02
0.79
835
8.
0.03
0.00
0.01
0.04
0.00
0.07
0.04
0.00
0.06
0.01
0.02
0.70
1365 1809
9.
0.04
0.02
0.05
0.00
0.01
0.12
0.03
0.02
0.05
0.03
0.03
0.60
10.
0.01
0.01
0.02
0.04
0.01
0.08
0.04
0.01
0.07
0.08
0.06
0.58
2977
11.
0.01
0.03
0.08
0.03
0.02
0.13
0.04
0.02
0.08
0.03
0.01
0.51
4640
12.
0.00
0.01
0.03
0.05
0.01
0.08
0.06
0.06
0.11
0.03
0.02
0.53
1942
13.
0.06
0.01
0.07
0.04
0.03
0.06
0.03
0.02
0.08
0.03
0.03
0.54
2338
14.
0.00
0.00
0.00
0.02
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.98
275
15.
0.00
0.00
0.04
0.00
0.01
0.08
0.03
0.00
0.03
0.02
0.00
0.80
1170
16.
0.00
0.00
0.02
0.00
0.00
0.00
0.01
0.02
0.05
0.01
0.00
0.89
3292
17.
0.69
0.00
0.00
0.01
0.00
0.04
0.09
0.03
0.01
0.00
0.00
0.13
903
18.
0.15
0.05
0.07
0.04
0.03
0.11
0.06
0.04
0.06
0.03
0.02
0.33
5038
19.
0.02
0.03
0.02
0.02
0.02
0.05
0.02
0.02
0.06
0.04
0.04
0.67
4708
a The (i, j)th column
element is the fraction
provides
the total number
of the first in the ith industry of observations
which end their fiscal years in the jth
in the corresponding
industry.
month.
The last
72
G. Hubertnan,
S. Kandel / Firms’jiscal
years,
sire and industry
Table 4 The relation, within each industry, between Industry 1
Large
Total
860
1492
2352
0.62
0.84
0.76
0.66
0.86
0.76
1043
1871
0.40
0.39
0.39
0.39
0.39
0.39
1264
541
1805
0.40
0.46
0.42
0.43
0.41
0.42
249
550
799
0.68
0.85
0.80
0.75
0.85
0.80
707
1540
2247
0.64
0.77
0.73
0.65
0.81
0.73
114
835
949
0.54
0.89
0.85
0.72
0.97
0.85
344
8
a
Small
828
2
firm size and fiscal year end over the years 1966-1985.
431
775
0.65
0.96
0.82
0.68
0.97
0.82
599
660
1259
8
0.61
0.80
0.71
8
0.60
0.81
0.71
9
992
529
1521
9
0.50
0.80
0.60
9
0.49
0.72
0.60
10
1255
1220
2475
10
0.59
0.61
0.60
10
0.59
0.61
0.60
11
1947
1675
3622
11
0.50
0.62
0.55
11
0.50
0.61
0.55
12
797
919
1716
12
0.40
0.67
0.54
12
0.42
0.67
0.54
13
1056
814
1870
13
0.44
0.71
0.56
13
0.42
0.69
0.56
14
24
174
198
14
0.88
1.00
0.98
14
0.97
1.00
0.98
15
484
513
997
15
0.79
0.80
0.79
15
0.80
0.79
0.79
G. Huberman, S. Kandel / Firms’ fiscal years, size and industry
73
Table 4 (continued) Small
Industry 16
396
Large
Total
2492
2888
16
0.80
0.92
0.90
16
0.86
0.95
0.90
17
408
379
784
17
0.13
0.11
0.12
17
0.14
0.11
0.12
18
2496
1496
3992
18
0.33
0.37
0.34
18
0.33
0.36
0.34
19
1710
1799
3509
19
0.48
0.80
0.64
19
0.48
0.80
0.64
0.49
0.71
0.54
0.67
Total
’ Two size classifications size-median average
number
fractions
are used. The first uses the population
within the industry
as the cut-off
of small and large
between
firms according
of small and large firms, according
wide size-median
as the cut-off
small and large firms. For each industry, to the first classification.
The second
to the first and second classification,
and the second
uses the
the first row provides
the
and third rows provide
the
whose fiscal year ends are in December.
We consider separately the 545 firms which satisfy the first two selection criteria but do not fall into one of the 19 industry categories. They tend to be smaller than those belonging to one of the industries, firms. 2.2.
but the systematic
Industry
relation
between
firm size and fiscal year end holds also for these 545
and the fiscal year end
Firms in industries with seasonal activities tend to choose their fiscal year ends at the time when their inventories are lowest. For instance, department stores are likely to close their book at the end of January. In table 3 we report the average (over the 20 years 196551984) choice of year end for firms in the 19 different industry categories. In table 4 we report the average fractions of small and large firms within each industry
which choose
December
31 as their fiscal year ends. The distinction
between large and small firms is based on sorting within industries and on the sample-wide sorting. The latter affords a look at the relation between size and industry. [For other relations between firm size and industry, see also Huberman, Kandel and Karolyi (1987). They classify stocks according to size and industry and study covariations of stock returns.] In most industries, more than 50% of the firms end their exceptions are
fiscal
years
on December
31. The
(1) Department stores. 69% of the firms in this category close their books on January 31. Only 13% of them end the fiscal year in December. The size distribution of the firms in this industry group resembles that of the whole population. (2) Other retail. Only 33% of the firms in this category end the fiscal year in December. The other frequent months are January (15%) and June (11 W). The firms in this group tend to be smaller than the firms in the whole population.
G. Huberman, S. Kandel / Fwms’fiscal
74
years, size and industg.
(3) Food. 40% of the firms in this category close their books in December. The other frequent months are June (13%) and May (8%). The firms in this group tend to be larger than the firms in the whole population. (4) Textiles. Firms in this category tend to close their books, if not in December (40%) then in January, June or September (8% each). They tend to be smaller than the first in the whole population. Tables 3 and 4 give the impression the pattern evident from table 2.
that industry
induced
choice
of fiscal year end is not behind
3. Relations to other studies in accounting and finance In this section we relate the results reported in section 2 to other studies in finance and accounting. Banz (1981) Reinganum (1981) and Keim (1983a, b) report that average returns on small firms’ stocks are higher than those on large firms’ stocks, especially in January. An interesting question is whether the empirical regularities in these papers are directly related to those reported here. Keim (1983a, b) provides a negative answer. He finds no relation between the size related difference in returns and the end of the fiscal year. In other words, once he controls for firm size, he cannot use fiscal year end to explain differences in average stock returns. Foster (1986) points out that across countries there is a great diversity in firms’ fiscal year ends. He cautions that such diversity may affect cross corporate comparisons if they are based on the corporations’ annual reports. This study shows that restricting a sample to firms whose fiscal years end on December 31 [see, e.g., Bushan (1986)] may induce a sample biased to have large firms. Beaver (1968) considers .NYSE firms whose fiscal year ends do not coincide with the calendar year’s end. He documents stock price reactions to annual earnings announcements. considers NYSE firms but includes firms which end their fiscal year on December stock price reactions reactions to earnings seeming
contradiction
to the annual earnings announcements. announcements are stronger for small between
Beaver
(1968)
and Grant
(1980)
Grant (1980) also 31. He fails to find
Atiase (1987) documents that price than for large firms. To settle the he conjectures
that ‘Beaver
(1968)
may have studied a sample of relatively small or average size Exchange firms while Grant (1980) may have studied a sample of relatively large firms’. This paper confirms that, on average, smaller firms appear in Beaver’s
sample than in Grant’s.
4. Summary and conclusions This paper documents a positive relation between a firm’s size and its likelihood to end its year with the calendar year. This positive relation is common across industries. It holds for whose stocks have been listed on NYSE or ASE for a while as well as for new comers to markets. Unfortunately, the data at hand do not reveal the dynamics which lead to this sectional pattern. Firms’ choice to coordinate
fiscal firms these cross
the ends of their fiscal years is puzzling. The turn of the fiscal year is a
period of intensive auditing and planning activities. These activities require employment of resources outside the firm. Contemporaneous employment of these resources by many firms implies seasonally high costs and an incentive for firms to choose different times to end their fiscal years. Why then do most firms end their fiscal years with the calendar year and why the systematic deviations from this regularity?
G. Hubermnn, S. Kandel / Firms’Jiscal years, size and industry
15
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