Reliability and Transparency of Non-GAAP Disclosures by Real Estate Investment Trusts (REITs)

Posted: 16 Oct 2007

See all articles by Bok Baik

Bok Baik

Seoul National University

Bruce K. Billings

Florida State University - Department of Accounting

Richard M. Morton

Florida State University - Department of Accounting

Abstract

This paper examines whether industry efforts to decrease managerial discretion, increase uniformity, and improve transparency of a non-GAAP performance measure change voluntary disclosure and market perceptions. We find that the frequency of REITs meeting or beating analysts' expectations of funds from operations (FFO) decreases following explicit industry initiatives to discourage manipulation. Concurrent with this shift, we find that the information content of FFO to investors increased, particularly for firms reporting a reconciliation of FFO with GAAP earnings. We also examine firms in other industries to assess alternative explanations for these results, such as SEC intervention. Collectively, our findings suggest that industry guidance about non-GAAP performance curtailed managers' opportunistic reporting. Furthermore, the market response to FFO is consistent with investors perceiving less manipulation and greater reliability. Our evidence also supports the SEC's subsequent requirement that all non-GAAP disclosures be reconciled to the nearest GAAP measures.

Keywords: funds from operations, REIT, non-GAAP measures, analysts' expectations, stock market reaction

JEL Classification: M41, M45, G12, G14, L52, L85

Suggested Citation

Baik, Bok and Billings, Bruce K. and Morton, Richard M., Reliability and Transparency of Non-GAAP Disclosures by Real Estate Investment Trusts (REITs). Accounting Review, March 2008. Available at SSRN: https://ssrn.com/abstract=1020127

Bok Baik

Seoul National University ( email )

Seoul
Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Bruce K. Billings (Contact Author)

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States
850-644-7889 (Phone)
850-644-8234 (Fax)

Richard M. Morton

Florida State University - Department of Accounting ( email )

Room No. 421
Tallahassee, FL 32306-8234
United States
850-644-7877 (Phone)

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