Information Acquisition Decisions and the Choice of Financial Year-Ends

Abstract

In some industries the financial-year-ends of member firms are clustered together whereas in others they are more widely dispersed. This study attempts to provide an explanation for this phenomenon. Recognizing that financial-year-ends are not just the time when firms disclose information but also the time when they acquire information (when books are closed), we frame this study in the larger economic context of determining the optimal timing of information acquisition and release. Prior studies have examined the frequency with which firms acquire costly information. We address a question that follows naturally: given that information is acquired only once every t operating periods, when during the t period should such an exercise take place? We also examine a related question: do competing firms have any incentive to share the information acquisition burden? The results of our analysis indicate that firms’ choice of their financial year-end may partially be driven by the degree of correlation between the firms’ cost (and demand) parameters and the incentives to share the information acquisition burden. Duopolists that face random but permanent shocks to their linear cost (or demand) parameter every period, but who can collect information in only some of the periods, will choose identical yearends (that which is dictated by the stochastic environment) unless their costs are very strongly correlated (almost close to 1). Only when their costs are highly correlated do the firms choose staggered year-ends. Whether year ends are clustered or staggered are also shown to be a function of the differences in cost variances for the two firms.