14-Week Quarters
Previous studies indicate that most firms define their fiscal quarters at 13-week hence a fiscal year has 52-weeks. Such an action leaves one or two days annually. Every fifth and sixth year receives an added week as compensation for the lost days (Johnston et al. 271). A 14-week quarter contains errors on stock returns and forecast errors. The main aim of this paper is to discuss the 14-week quarters.
Research Setting
The setting of this study takes place in 658 financial analysts firms. The firms’ financial analysts analyze economic information that provides financial forecasts on stock markets and stock returns. The research environment indicates that financial analysts in a 14-week quarter fail to notice extended reporting periods and underrate performance on the added one week (Johnston et al. 274). The research environment demonstrates that the incentives financial analysts receive present an impact on the relative forecast accuracy. Firms that give modest incentives to their analysts receive accurate forecasts unlike those that do not offer such incentives.
Challenge of the Article to the Efficient Market Hypothesis (EMH)
The efficient market hypothesis suggests that share prices must reflect all information to ensure market efficiency. The article poses a challenge to such suggestions because analysts at some point fail to include present information available concerning the firm’s future performance in their forecasts. The purpose of not involving such data remains unclear hence presenting a challenge to the EMH (Johnston et al. 276). The article does not demonstrate the actual causes of why analysts avoid including all forecasts information on their financial forecasts reports during the 14-week quarters. The article also indicates that 14-week quarters remain predictable as the firms disclose their fiscal policies.
Some of the evidence from the article is that cognitive processing constraints hinder analysts from processing all information available concurrently. The analysts claim that multiple tasks and limited attention makes them not to process all available information. Consequently, analysts most likely ignore to account for the extra week’s earnings and revenue since they are all positive within the 14-week quarters (Johnston et al. 278). Modest incentives enable analysts to allocate their efforts in making accurate forecasts, unlike other job responsibilities in the firms. For this reason, those analysts from firms that do not provide modest incentives see their analyst make forecasts full of errors on stock returns and revenues. Limited attention and numerous tasks placed upon the analysts make them decide rationally not to put the required effort to recognize 14-week quarters and make appropriate adjustments for the added week.
The other evidence is that investors ignore the one-week forecasts since for them earnings and returns should remain similar in both the 13-week quarters and 14-week quarters. In this perspective, the investors handle unexpected revenues and earnings consistently mainly because the information from the added week has no new information and remains transitory. The analysts assume adding the data from the extra one week because the investors ignore the necessary disclosures (Johnston et al. 279). The other evidence is that the added week would witness prices drifting up upon the release of the information regarding higher earnings and revenues to the markets hence the strategy of purchasing and holding stock among these firms within a 14-week quarter promotes earning of positive returns. Such reasons make analysts from processing all data in the 14-week quarters. The author does not provide compelling evidence for challenging efficient market hypothesis. In this case, the author does not answer why analysts decide not to process all the data in 14-week quarters while in a 13-week quarter, they handle all information.
Conclusion
The 14-week quarters have more benefits as they enhance returns that are more positive and revenues to the firms—unawareness among investors about the extra week results in investors’ mis-reaction in the markets. Modest incentives make analysts make accurate forecasts in such firms.
Work Cited
Johnston, Rick, et al. “14-Week quarters.” Journal of Accounting and Economics 53.1-2 (2012): 271-289.