An Empirical Evaluation of the Usefulness of Non-Gaap Accounting Measures in the Real Estate Investment Trust Industry

Posted: 17 Sep 1999

Abstract

We conduct three sets of analyses to compare the usefulness of net income, based on generally accepted accounting principals (GAAP), and the industry-advanced funds from operations (FFO) in the context of the real estate investment trust (REIT) industry. In our first set of tests, we find that FFO is more strongly associated with one-year ahead FFO and one-year ahead operating cash flows than is net income. Conversely, we find that net income explains more variation in one-year ahead net income and current stock price than does FFO. Second, in support of the claim that some REITs manipulate FFO, we document that young REITs and REITs that are likely to access capital markets are more likely to manage FFO. Third, we find that, for a sample of firms that disclose current value information, both net income and FFO fail to reflect holding gains or losses on unsold properties in a timely manner. Overall, our analyses suggest that the REIT industry?s claim that FFO is more useful than net income in premature because the superiority of one measure over the other is highly contextual.

JEL Classification: M41, M43, M44

Suggested Citation

Fields, Thomas D. and Rangan, Srinivasan P. and Thiagarajan, S. Ramu, An Empirical Evaluation of the Usefulness of Non-Gaap Accounting Measures in the Real Estate Investment Trust Industry. Review of Accounting Studies, Vol 3, Nos 1-2, 1998. Available at SSRN: https://ssrn.com/abstract=165852

Thomas D. Fields

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Srinivasan P. Rangan

Indian Institute of Management (IIMB), Bangalore

Bannerghatta Road
Bangalore, Karnataka 560076
India

S. Ramu Thiagarajan (Contact Author)

Mellon Capital Management Corporation ( email )

595 Market Street
Suite 3000
San Francisco, CA 94105
United States
415-975-3512 (Phone)

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