SEC Intervention and Industry Guidance: The Effect on Non-GAAP Financial Disclosures

Abstract

This paper examines how the U.S. Securities and Exchange Commission (SEC) intervention in 2003 regarding non-GAAP disclosures affects the reporting of Funds from Operations (FFO), an industry-guided non-GAAP performance measure commonly reported by Real Estate Investment Trusts (REIT). We find that, contrary to the results of prior studies of pro forma earnings, the SEC intervention does not deter the reporting of FFO. Nonetheless, we show that the quality of FFO disclosures improves significantly subsequent to additional disclosure requirements and increased scrutiny by the SEC in 2003. In particular, we find that (1) companies are more likely to follow the industry guidance in defining FFO; (2) all exclusions from FFO have become more transitory following the SEC intervention; and (3) companies are less likely to manage the FFO measure to beat or meet analysts' forecasts. Lastly, we examine investors' perceptions regarding the usefulness of the FFO measure and find that the market perceives FFO as being more value relevant following the intervention of the SEC. Collectively, our findings suggest that, with sufficient industry guidance, the SEC can best achieve its objectives of improving the quality of non-GAAP reporting without the unintended consequences of deterring firms from reporting value relevant non-GAAP information.

Keywords: Non-GAAP Reporting, Regulation G, Sarbanes-Oxley, Industry Guidance, Funds from Operations, REIT

JEL Classification: M41, M43, M45, G38, M48