Why Fama–French Accounting Factors Use a Six-Month Lag
Summary
The note explains why Fama–French factor research commonly waits six months after fiscal year-end before using accounting data such as book-to-market and firm size. Although quarterly reports may become available sooner, reporting dates and filing delays vary, so a shorter fixed lag could include information that investors did not yet have at the portfolio formation date.
The cited discussion of the original Fama–French study points out that some companies missed the 90-day filing deadline, and some timely December year-end filings were not public until April. A June portfolio start therefore gives a conservative availability buffer, with the actual gap longer for firms whose fiscal year ends earlier. The answer characterizes this convention as cautious rather than uniquely necessary: researchers can test shorter lags as a robustness check, provided the choice matches the information available in their setting. The note does not compare the performance of alternative lags empirically.
Key ideas
- A six-month post-year-end lag is intended to reduce look-ahead bias by allowing accounting information to become public.
- Filing deadlines do not guarantee that every report is filed or released on time.
- A June portfolio formation date creates different effective lags across fiscal year-ends.
- Researchers can evaluate shorter accounting-data lags as a robustness check.
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Full text
# FF 6-month lag of the accounting variables # FF 6-month lag of the accounting variables I have a fairly short and straightforward question. I am running a dynamic optimization strategy and therefore need to construct the FF5 characteristics. I am using COMPUSTAT quarterly accounting data. Now my question is why are all accounting variables such as Book-to-market ratio, size etc. constructed using at least 6 months following the FF 1992 convention. I understand that this ensures the availability of data to investors. What I do not understand is why this is not the case with a 3/4 month lag as all firms issue quarterly earning reports and therefore the information would be available correct? I know that Asness/Frazzini (2013), the Devil in the HML details have written a paper highlighting the fact that updating the price (in book-to-market ratio) is superior to lagging it half a year. Why not also update the accounting variables every month and only include a three month lag (at most)? I Hope someone provide some perspective. ## Answer by skoestlmeier (score 3, accepted) https://quant.stackexchange.com/a/54679 This is directly addressed by Fama/French themselves in their seminal 1992 paper The Cross-Section of Expected Returns, p. 429. The six month lag is the most common, but minimum gap between fiscal year-end and the subsequent return test beginning in end June the following year. A firm having fiscal year-end on January would have a maximum lag of even 18 month by entering the sample! > Firms are required to file their 10-K reports with the SEC within 90 days of their fiscal year-ends. However, on average 19.8% do not comply. Furthermore, more than 40% of the December fiscal year-end firms that do comply with the 90-day rule file on March 31, an their reports are not made public until April (see Alford et al. (1992)). Well, the six month lag appears to be really conservative. However, the overall research question in their paper is the cross-sectional effect of book-to-market ratios and firm size on stock returns (i.e. value- and size-anomaly). If the main results would heavily depend on the portfolio sorts starting on end June rather than e.g. end April, their findings would not be very robust. In summary, you may choose a different time lag for accounting data and see this as a robustness-check for your overall research question.
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