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Journal of Accounting and Economics 10 (1988) 335-344.

North-Holland

A COMPARISON OF THE FINANCIAL CHARACTERISTICS OF


DECEMBER AND NON-DECEMBER YEAR-END COMPANIES*

David B. SMITH
Claremont-McKenna College, Claremont, CA 91711, USA

Susan POURCIAU
Florida State University, Tallahassee, FL 32306, USA

Received September 1987, final version received July 1988

Researchers often restrict their sample selection to either December or non-December Compustat
companies. However, no one has rigorously investigated the implications of this restriction. This
paper compares financial characteristics of December and non-December year-end companies.
December year-end firms are larger and have smaller betas as compared to companies with
non-December year-ends. There are some strong industry concentrations in December year-ends,
most notably in the regulated or recently deregulated industries. Retail sales firms have primarily
non-December year-ends. A comparison of leverage ratios does not reveal a stable systematic
difference between December and non-December year-end companies,

1. Introduction
Researchers using Compustat data often include a fiscal year-end restriction
in their sample selection process, limiting their samples to either December or
non-December year-end companies. Studies with a year-end restriction include
Lipe (1986) Rayburn (1986) and Ettredge, Shane, and Smith (1988). Two
early examples are Ball and Brown (1968) which used only December year-end
companies, and Beaver (1968) which included only non-December year-end
companies. Both the early studies mention possible generalizability limitations
due to the year-end restriction while the Ettredge et al. study suffers limita-
tions associated with the power of statistical tests.
Generalizability in market-based research may be affected due to the
presence of systematic differences between December and non-December
year-end companies which have been found to impact the market measure of
the treatment effect. For example, Atiase (1985) and Defeo (1986) provide
support for possible interactions between the dependent variable, such as

*The authors are grateful to Ray Ball (the editor) and S.P. Kothari (the referee) for their helpful
comments in the development of this manuscript.

0165-4101/88/$3.50~1988, Elsevier Science Publishers B.V. (North-Holland)


336 D. B. Smith and S. Pourciau, A comparison of financial characteristics

unexpected security price changes (Atiase) or duration of price adjustments


(Defeo), and certain financial characteristics, such as firm size, which vary
systematically between subgroups of companies. When a subgroup is excluded
from the sample selection process due to a year-end restriction, the resulting
sample is not a random sample from the overall population of interest and
may be biased in terms of company characteristics and the potential interac-
tion effects.
In addition, the power of tests in a matched-pair design may be affected
because the year-end restriction limits sample size. For example, Kinney
(1986) discusses the need to control for factors that may interact with the
dependent variable and suggests the use of a matched-pair design. He indi-
cates, however, that sample size, and so the power of statistical tests, may be
decreased due to an inability to successfully match treatment and control
companies. He suggests that this decrease in power may be due to the studys
design. One component of a research design is often a December or non-
December year-end restriction and so researchers may inadvertently exclude
potential matching companies because of this design characteristic.
In this study we select financial characteristics that are often controlled for
or used as matching variables in market-based research and investigate the
extent of similarity of these characteristics between December and non-
December Compustat companies. Since many studies only use a subset of all
companies listed on the Compustat and the subset is associated with exchange
listing, we conduct our investigation on three overlapping samples of compa-
nies: (1) New York Exchange companies, (2) New York and American
Exchanges companies (this corresponds closely to companies listed on CRSP
Daily Returns tape), and (3) all companies listed on the industrial Compustat
1987 tape. The financial characteristics are ones that Foster (1986) indicates
may be associated with capital market anomalies or ones that other re-
searchers suggest may affect a studys outcome. We focus upon the following
characteristics: firm size [see Atiase (1985)], market beta [see Friend and
Blume (1966)], leverage [see Watts and Zimmerman (1986)], and industry
membership [see Ring (1966)]. For completeness, we also briefly discuss our
examination of several additional variables suggested by Foster (1986). These
additional variables, though potentially important, are not commonly men-
tioned as ones researchers should control for in their experimental designs.
In the next section we present our research methodology, followed by a
discussion of empirical results in section 3.

2. Research method

2.1. Data

Our sample contains the total usable population of Compustat firms for two
years. The only firms that are eliminated are those with missing data. Since
D. B. Smith and S. Pourciau, A comparison of financial characteristics 331

many of the financial characteristics do not greatly change from year to year,
an examination of a number of contiguous years does not provide independent
cross-sections of data. Population characteristics may change over time, how-
ever, so we thought it useful to examine these financial characteristics for two
noncontiguous years. We selected the years 1978 and 1982 for analysis and all
companies on the Compustat Industrials file for which relevant data are
available are included in the analysis. For each year and for each characteris-
tic, the December and non-December year-end companies have been analyzed
separately to provide a comparison summary.

2.2. Characteristics

We identify the variables by their Compustat variable numbers. We define


the variables as follows: 1) Firm size (total assets), 6; 2) Firm size (market
value of common equity), 24 X (25/1000); 3) Leverage (total liabilities/market
value of common equity), (5 + 9)/(24 x (25/1000)); and 4) Industry (two-digit
SIC code), DNUM. In addition we examine other ratios: the return on total
assets (net income before tax before extraordinary items/total assets), return
on equity (income/equity), the working capital ratio, sales/total assets,
cash/sales, working capital/sales, debt service coverage, and the price-earn-
ings ratio. The data are taken from the annual Compustat Industrial Tape for
two years. We use the price and dividend data during the January 1977 to
December 1979 period from the Compustat Price-Dividends-Earnings (PDE)
tape to estimate betas for the 1978 samples and for the 1982 samples during
the period January 1981 through December 1983.2 The market index is
constructed from the New York Stock Exchange Composite Index also found
on the PDE tape.3 Finally, the exchange listing for each sample company is
identified using the information available on both the Compustat and PDE
tapes.

3. Results

3.1. Firm size

First we compare size (both market and book values) for the December and
non-December groups. Table 1 summarizes the distributional characteristics of

We chose 1978 and 1982 because these two years were current enough to be relevant to current
research topics while at the same time far enough in the past to be of value to researchers who use
a historical time series in their studies.
We used three years to estimate beta because most studies use at least 36 observations, even
when monthly data are used.
3The company common stock returns and New York Stock Exchange Composite Index are
adjusted for dividends.
338 D. B. Smith and S. Pourciau, A comparison of$nancial characteristics

Table 1
Size, beta, and leverage.

1978 1982
12/31 Non-12/31 12/31 Non-12/31

(A) Size - Total assetsa


NYSE
Mean (millions) 2584.43 542.46 4014.65 764.67
Median (millions) 625.78 176.88 921.85 274.99
Skewness 8.24 6.95 7.36 5.38
Minimum (millions) 11.73 3.54 10.96 1.32
Maximum (millions) 103327.00 15262.10 148185.00 17330.10
Std. dev. (millions) 7485.80 1254.42 10859.22 1457.08
Number 888 495 948 499
NYSE and ASE
Mean (millions) 1947.22 354.82 2945.70 476.48
Median (millions) 309.86 86.15 406.26 119.30
Skewness 9.45 8.23 8.55 6.74
Minimum (millions) 1.66 0.54 3.87 0.86
Maximum (millions) 103327.00 15262.10 148185.00 17330.10
Std. dev. (millions) 6532.84 1029.81 9361.01 1161.34
Number 1199 842 1322 871
All companies
Mean (millions) 1912.51 349.04 2900.45 471.64
Median (millions) 354.51 85.84 468.33 119.42
Skewness 9.95 8.33 8.96 6.80
Minimum (millions) 1.66 0.54 3.68 0.86
Maximum (millions) 103327.00 15262.10 148185.00 17330.10
Std. dev. (millions) 6175.09 1018.00 8894.48 1148.68
Number 1350 863 1473 894

(B) Size - Marker valueb


NYSE
Mean (millions) 739.03 167.37 1121.74 517.79
Median (millions) 209.88 77.90 571.45 174.76
Skewness 12.27 6.67 11.58 5.73
Minimum (millions) 2.74 1.84 5.77 7.14
Maximum (millions) 43509.67 7330.61 57951.43 9974.12
Std. dev. (millions) 2452.42 6151.34 3249.16 1077.15
Number 882 492 932 493
NYSE and ASE
Mean (millions) 567.87 169.11 832.58 320.88
Median (millions) 111.64 32.15 190.01 66.78
Skewness 13.97 8.17 13.34 7.19
Minimum (millions) 0.54 0.39 1.51 1.65
Maximum (millions) 43509.67 7330.61 57951.43 9974.12
Std. dev. (millions) 2142.17 495.79 2793.81 856.30
Number 1181 827 1301 862
All companies
Mean (millions) 521.70 176.37 772.29 324.94
Median (millions) 104.24 32.83 171.57 67.50
Skewness 14.72 8.24 13.96 7.05
Minimum (millions) 0.54 0.39 1.51 0.17
Maximum (millions) 43509.67 7330.61 57951.43 9974.12
Std. dev. (millions) 2030.01 491.07 2661.47 859.29
Number 1322 844 1444 881
Table 1 (continued)

1978 1982
12/31 Non-12/31 12/31 Non-12/31

(C) Betac
NYSE
Mean 1.18 1.46 1.00 1.14
Median 1.13 1.40 0.95 1.05
Skewness 0.58 0.43 1.02 0.83
Minimum -0.10 - 0.09 - 0.47 - 0.06
Maximum 3.36 3.87 3.75 3.67
Std. dev. 0.58 0.64 0.53 0.55
Number 761 402 878 422
NYSE and ASE
Mean 1.20 1.43 1.00 1.14
Median 1.17 1.38 0.96 1.05
Skewness 0.54 0.27 0.88 0.81
Minimum - 0.34 - 1.50 - 0.47 -0.85
Maximum 3.57 4.29 3.75 4.23
Std. dev. 0.60 0.67 0.55 0.60
Number 959 601 1120 647
All companies
Mean 1.19 1.43 0.98 1.14
Median 1.14 1.38 0.92 1.05
Skewness 0.51 0.43 0.88 1.50
Minimum - 0.51 - 1.50 - 3.89 - 1.24
Maximum 3.57 5.63 6.12 8.56
Std. dev. 0.61 0.74 0.62 0.77
Number 1258 907 1693 1355

(D) Leveraged
NYSE
Mean 1.91 2.11 1.70 1.28
Median 1.30 1.05 1.11 0.76
Skewness 12.46 8.34 7.57 5.92
Minimum 0.00 0.00 0.00 0.00
Maximum 74.41 65.11 44.78 23.23
Std. dev. 3.72 4.76 3.07 1.94
Number 798 482 839 481
NYSE and ASE
Mean 1.90 2.16 1.80 1.59
Median 1.28 1.19 1.07 0.80
Skewness 12.11 2.69 19.73 4.12
Minimum 0.00 0.00 0.00 0.00
Maximum 74.41 65.10 44.78 138.17
Std. dev. 3.42 3.95 3.16 5.11
Number 1087 810 1195 844
All companies
Mean _ 1.90 2.21 1.80 1.58
Median 1.29 1.19 1.10 0.80
Skewness 12.22 8.86 6.56 23.21
Minimum 0.00 0.00 0.00 0.00
Maximum 74.41 65.10 44.78 138.17
Std. dev. 3.37 3.91 3.11 5.16
Number 1123 827 1233 863

Size - total assets is Compustat variable number 6.


bSize - market value is defined as Compustat variables 24 X 25 (variable scaled by 10m3).
The market beta is defined as the regression coefficient relating the monthly return for each
s?ple firm to the NYSE Composite Index.
Leverage is defined as Compustat variables (5 + 9)/(24 X 25) (variable scaled by 10m3).
340 D. B. Smith and S. Pourciau, A comparison offinancial characteristics

each size measure. In addition we use three statistical tests to compare the two
groups: a two-sample t-test, a Wilcoxon signed-rank test, and a two-sample
median test.4
Table 1 reports company characteristics for the New York Stock Exchange
(NYSE), the New York and American Stock Exchange (NYSE&ASE), and all
Compustat companies with usable information. Since the asset size informa-
tion is similar for the three overlapping samples, our description concentrates
on the NYSE group. The NYSE summary for 1978 indicates that the median
asset size of December companies is more than two and one-half times the
medium of non-December companies when accounting values are used. How-
ever, both distributions are skewed to the right, and so the cumulative deciles
may reveal insights not revealed by the mean and median. The 1978 results,
which are not shown, indicate that the December firms are consistently larger
and that this group is more skewed than the non-December gro~p.~ The
two-sample t-test, the Wilcoxon signed-rank test, and the test for median
equality all reject, with a significance level in excess of 0.01, the null hypothe-
sis that the mean or median are the same for the two groups.6
Although the magnitude of firm size increases between 1978 and 1982, the
relationship between December and non-December firms is consistent for the
two years. Our parametric and nonparametric tests (p-value < 0.01) support
this conclusion. Table 1 and our statistical results indicate the same relation-
ships using the market values of common equity.

3.2. Market beta

The second characteristic we compare is the market beta of a companys


common equity. We computed these values for the three previously mentioned

4Both parametric and nonparametric tests were conducted for comparison. Even though the
population distributions are not normal, the sampling distributions of the means, with large
sample sizes, will be approximately normal, according to the Central Limit Theorem.
These results are available upon request.
6The statistical tests performed are valid given certain assumptions and the results presented
here should be interpreted with caution, since the assumptions may not be satisfied. All three tests
assume two independent random samples. Our groups may be cross-sectionally dependent and
may differ from true random samnles. Further, the Wilcoxon signed-rank test assumes identical
disiributions except for the central location parameter [see Dame1 (1978)]. The r-values for the
1978 book-value t-tests were 7.93, 8.29. and 9.11 for the NYSE, NYSE and ASE, and all samples,
respectively. The r-values for the 1982 tests were 9.06, 9.48, and 10.34, respectively. The z-values
for the 1978 median tests were 11.48, 12.21, and 14.06, respectively. The z-values for the 1982
median tests were 10.65, 11.63, and 12.96, respectively. The z-values for the 1978 Wilcoxon
two-sample tests are 12.35, 14.22, and 16.04, respectively. The z-values for the 1982 tests were
11.92, 13.80, and 15.50, respectively. The t-values for the 1978 market value r-tests were 5.56, 6.17,
and 6.07, respectively. The r-values for the 1982 tests were 5.17, 6.18, and 5.50, respectively. The
z-values for the 1978 median tests were 8.32, 11.02, and 11.37, respectively. The z-values for the
1982 median tests were 6.27, 9.55, and 9.77, respectively. The z-values for the 1978 Wilcoxon
two-sample tests were 9.83,12.90, and 13.23, respectively. The corresponding z-values for the 1982
tests were 7.58, 10.41, and 10.38, respectively.
D. B. Smirh and S. Pourcinu, A comparison offinancial characteristics 341

samples of companies. The betas were calculated twice over a 36-month


period: once for firms examined in the 1978 analysis and once for firms found
in the 1982 analysis. Nonusable companies include those with missing monthly
prices during the relevant periods. We took price and dividend data from the
Price-Dividends-Earnings tape and we computed the betas for the period
from January 1977 to December 1979 and the period from January 1981 to
December 1983. The closing prices on December 1976 were used as the
opening prices on January 1977 so each beta was calculated with 36 returns.
The results in table 1 indicate a higher mean and median for the non-
December firms. The distributions for both the December and non-December
firms tend to be symmetric with a slight skewness to the right. The cumulative
deciles support the conclusion of slightly skewed distributions with a larger
mean for the non-December firms. The r-test, Wilcoxon signed-rank test, and
median test results are significant at more than the 0.05 level for both 1978
and 1982. These results suggest the mean and median betas for December and
non-December Compustat companies are not the same.7

3.3. Leverage

Table 1 reflects the distribution of leverage (debt to market value of equity


ratio) for our groups. In 1978, December firms had lower average debt-equity
ratios than did non-December companies, though the median ratio was higher.
In 1982, however, the picture changed somewhat. The December firms had
higher mean and median leverage ratios. The results of our statistical tests
confirm the lack of a stable systematic difference between leverage for Decem-
ber and non-December firms. In general, our statistical results indicated an
inability to reject, at any reasonable level of significance, the hypothesis that
no difference in mean ratio exists for the 1978 comparison. We are able to
reject the null hypothesis of median equality for the 1978 NYSE comparisons,
the null hypotheses for mean equality for the 1982 NYSE comparisons, and
the null hypotheses for all median 1982 comparisons.8

The t-values for the 1978 two-sample tests were 7.77, 7.13, and 8.41 for the NYSE, NYSE and
ASE, and all samples, respectively. The t-values for the 1982 two-sample tests were 4.36,4.82, and
6.20, respectively. The z-values for the 1978 median tests are 6.30, 5.98, and 7.15, respectively. The
z-values for the 1982 median test are 3.20, 3.23, and 5.07, respectively. The z-values for the 1978
Wilcoxon two-sample tests were 7.58, 7.14, and 8.30, respectively. The z-values for the 1982 tests
were 4.36, 4.75, and 5.95, respectively.
The r-values for the 1978 leverage tests were 0.78, 1.50, and 1.46 for the NYSE, NYSE and
ASE, and all samples, respectively. The f-values for the 1982 tests were 3.01, 1.09, and 1.14,
respectively. The i-values for the median 1978 tests were 2.65, 0.91, and 0.96, respectively. The
z-values for the 1982 tests were 5.20. 4.30. and 4.57. respectivelv. The z-values for the Wilcoxon
1978 two-sample tests are 1.68, 0.95; and 0.70, respectively. Tde z-values for the 1982 tests are
4.46, 3.68, and 3.91, respectively.
Table 2
Industry concentrations, 1982.=

NYSE ASE and NY SE All companies


SIC Industry Total % 12/31 % non-12/31 Total % 12,31 % non-12/31 Total % 12/31 % non-12/31

1 Agricultural production 4 25 75 7 57 43 8 38 62
10 Metal mining 17 94 6 28 93 7 28 93* 7
12 coal 6 83 17 7 71 29 8 75 25
13 Oil and gas exploration 38 79 21 104 65 35 104 65 35
14 Nonmetallic mineral 3 100* 0 4 100* 0 4 1OW 0
15 Building construction 4 75 25 10 50 50 10 50 50
16 Construction - not bide. 9 89 11 12 83 17 12 83 67
17 Construction - special Trade 1 0 1OQ* 6 33 67 6 33 67
20 Food and kindred products 53 42 58 73 36 64 75 37 63
21 Tobacco 5 0 7 86 14 86 14
22 Textile products 19 47 53 36 44 56 36 44 56
23 Apparel 22 22 78 42 33 67 42 33 67
24 Lumber and wood products 10 60 40 28 46 54 28 46 54
25 Home furnishing 5 1OO* 0 13 69 31 14 64 36
26 Paper and allied products 29 86 14 38 84 16 40 85 15
27 Printing and pubiishing 36 67 33 48 67 33 50 66 34
28 Chemicals and allied
products 87 71 29 105 72 28 107 72 28
29 Petroleum refining 34 91 9 43 91: 9 42 91; 9
30 Rubber and misc. plastics 22 59 41 44 61 39 44 61 39
31 Shoes 9 33 67 17 35 65 17 35 65
32 Stone, clay, glass, concrete 25 92* 8 33 79 21 33 79 21
33 Primary metal industries 44 70 30 54 70 30 54 70 30
34 Fabricated metal products 40 70 30 73 64 36 74 65 35
35 Machinery, except electrical 75 63 37 110 58 42 112 58 42
36 Electrical and electronic
machinery, equipment
and supplies 125 56 44 214 50 50 219 50 50
37 Transportation equipment 47 68 32 71 63 37 72 64 36
38 Instruments 39 56 44 67 54 46 67 54 46
39 Miscellaneous manufacturing 17 65 35 30 63 37 30 63 37
40 Transportation - railroad 10 100: 0 10 100s 0 10 100* 0
42 Trucking I?
_- 83 17 19 84 16 20 85 I5
44 Water transport 4 75 25 5 80 20 5 80 20
45 Air transport 17 88 12 23 91 9 23 91* 9
41 Transportation services 3 61 33 8 SO 50 8 50 50
48 Telephone and broadcast
45 60 40 50 62 3x 51 61 39
49 Electric, gas, sanitary service 159 88 12 171 87 13 214 84 16
50 Wholesale - durable goods 23 43 57 52 40 60 52 40 60
51 Wholesale - nondurables 16 38 62 35 34 66 35 34 66
52 Retail - bldg. materials etc. 8 13 87 9 11 89 9 11 89
53 Retail stores 24 8 92 31 10 90 31 10 90**
54 Retail - food 20 40 60 31 42 58 32 44 56
55 Retail - auto and aas 1 0 100* 3 0 1CQ** 3 0 1OQ**
56 Retail - apparel - 9 44 56 15 33 67 15 33 67
51 Retail - furniture etc 4 0 100* R 0 100** 8 0 loo**
58 Restaurants 14 36 64 18 39 61 18 39 61
59 Retail - other 24 13 87 37 14 86 37 14 86
60 Financial, banks 56 100: 0 59 100* 0 149 100* 0
61 Investment companies 21 81 9 30 77 23 30 77 23
62 Brokerage firms 14 51 43 16 56 44 16 56 44
63 Insurance 20 100 0 20 100* 0 36 100* 0
64 Insurance agents, brokers 4 100* 0 4 100* 0 4 100* 0
65 Real estate 22 36 64 44 43 57 44 43 57
61 REIT 32 41 59 64 47 53 64 47 53
70 Hotels 10 50 50 12 50 50 12 50 50
12 Personal services 4 0 100** 5 20 80 5 20 80
13 Business services 29 52 48 50 46 54 51 45 55
15 Automotive services 2 50 50 6 50 50 6 50 50
78 Motion pictures 5 20 80 9 22 78 9 22 78
79 Gaming companies 6 50 50 11 36 64 11 36 64
80 Hospital management 11 27 73 17 24 76 17 24 76
82 Education services 2 100* 0 2 100* 0 2 100 0
89 Engineering, architect,
service 8 63 37 16 56 44 16 56 44
All companies 1464 65 35 2214 60 40 2388 62 3x
_.
aOne asterisk (*) indicates that 90% or more of the companies in the industry have a 12/31 year-end, and two (**) indicate that 90% or more of the
companies in the industry have non-12/31 year-ends. K
344 D.B. Smith and S. Pourciau, A comparison o/financial characteristics

3.4. Industry membership

The results of the industry analysis are found in table 2. There is an asterisk
(*) next to the percentage if 90% or more of the companies in an industry have
a December year-end and two (**) next to the percentage if 90% or more of
the companies have non-December year-ends. Industries in which 90% or
more of the firms have a December year-end tend to be regulated or ones
which were only lately deregulated such as banking, insurance, and transporta-
tion. The industries in which 90% or more of the companies have non-Decem-
ber year-ends are in the retail sales area. In addition, the table indicates that
the percentage of firms in a given industry with December year-ends tends to
be relatively stable over time. Therefore, the overall conclusion of our industry
analysis is that either a December or a non-December year-end restriction for
sample selection may have a significant effect upon the industry composition
of the sample.9

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91n addition to size, beta, and leverage, we compared a number of other ratios for the December
and non-December year-end groups. At least one ratio was selected from each of the ratio
categories suggested by Foster (1986). The following ratios were examined: return on assets,
return on equity, income/sales, debt service coverage, and price-earnings ratio. Of these ratios,
only sales/total assets and cash/sales exhibit significantly different means between the December
and non-December firms, as measured by a p-value of less than 0.05 for a two-sample r-test.
Non-December firms exhibit higher sales/total asset ratios and lower cash/sales ratios.