the calculation of compustat data
Posted: 19 December 2014 09:23 PM   [ Ignore ]
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Dear Joost,
    I find that some papers construct the measure of book-to-market ratio like this: the ratio of book value of common equity (previous fiscal year) to market value of common equity (end of previous calendar year). I wonder why the nominator is fiscal year end and the denominator is calender year end. Is there any rationale for this? Also, some papers state that the variables that used compustat data are recalculated each July and held constant through the following june. I have the same doubt for this. Why just use fiscal year end? 
    Could you help me with it?

Best,
Xinijao

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Posted: 20 December 2014 08:05 AM   [ Ignore ]   [ # 1 ]
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hi Xinijao,

I would think it is a matter of convenience. Stock price data is easy to measure at any point in time, so it would be the case the researchers would want to use calendar years. Instead of trying to interpolate end-of-quarter book values to get the end of calendar book equity, taking end of fiscal year equity is easier (and it probably wouldn’t matter doing it more precise).

As for measuring items in July. I would think this comes from the idea that it takes 3-4 months for firms to file their 10-K (the accelerated filing stuff makes it obviously shorter these days). So, half way the year it is safe to assume all firms have filed their annual report and that this information is incorporated into stock prices when filed (and not necessarily at fiscal year end).

I’m not 100% sure about these things though.

best regards,

Joost

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