Information Uncertainty of Fiscal Year End Quarter Earnings

Abstract

In this paper, we provide evidence that the information uncertainty risk associated with the fiscal-year-end (FYE) quarter earnings is unique in nature. Based on a long sample period from 1984 to 2015, we show that there is a significantly lower earnings response coefficient (ERC) for FYE quarters than for Non-FYE quarters. Furthermore, we show that this type of information uncertainty risk cannot by explained by other identified risk factors. We explain that both the integral explanation and earnings manipulation explanation, which have been established in prior literature, are not exclusive of each other in explaining the risk associated with FYE quarter earnings. More importantly, we offer solutions to mitigate this type of information risk: 1) strong corporate governance and 2) a more streamlined financial reporting structure, either by firms’ willingly reducing the usage of extraordinary item reporting or by SFAS codification changes such as SFAS 145.

Keywords: Fiscal-year-end (FYE) quarter earnings, Information uncertainty, Market reactions, FASB Statement No. 145

JEL Classification: G14, M41, N21