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Orphans Deserve Attention: Financial Reporting in the Missing Months When Corporations Change Fiscal Year

53 Pages Posted: 31 May 2010 Last revised: 6 Sep 2011

Kai Du

Pennsylvania State University

Frank Zhang

Yale School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 5, 2011

Abstract

We examine firms’ financial reporting practices during stub periods that are induced by fiscal year changes and not covered by regular quarters. We find that firms report much lower income for the missing months than for adjacent quarters, mainly by recording higher operating expenses. We also find that managers have various incentives to manage earnings. Executive compensation is not tied to firm performance in the transition period as it is in adjacent fiscal years. Growth firms, firms with poor stock returns, and firms with poor external and internal monitoring tend to manage earnings more. Finally, we find that firms are more likely to meet or beat earnings targets in the subsequent quarter by reporting lower income in the missing months. Investors and analysts perceive the earnings surprise to be less persistent in the quarter after the missing months than in the quarter before.

Keywords: Financial reporting, earnings management, accruals, return, fiscal year-end

JEL Classification: G10, G12, G14, G30, M40, M41, M49

Suggested Citation

Du, Kai and Zhang, Frank, Orphans Deserve Attention: Financial Reporting in the Missing Months When Corporations Change Fiscal Year (September 5, 2011). Available at SSRN: https://ssrn.com/abstract=1618598 or http://dx.doi.org/10.2139/ssrn.1618598

Kai Du

Pennsylvania State University ( email )

306 Business Building
University Park, PA 16801
United States

Frank Zhang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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