CEO Influence on Funds from Operations (FFO) Adjustment for Real Estate Investment Trusts (REITs)

32 Pages Posted: 1 Jun 2020

See all articles by Zhilan Feng

Zhilan Feng

Clarkson University

Zhilu Lin

Clarkson University - Department of Economics and Finance

Wentao Wu

Clarkson University

Date Written: May 3, 2020

Abstract

This paper investigates non-GAAP performance measures of the REIT industry, specifically the difference (FFO adjustment) between concurrent FFO and Net Income (NI). Using the U.S. Equity REIT data from 1993 to 2018, we first find evidence that both NI and FFO are associated with REIT market-adjusted stock returns, suggesting both contain information that is valuable to investors. Second, we document a significant and positive relationship between contemporaneous FFO adjustment and NI, indicating a possible “selective” and “intentional” inclusion and/or omission of the “good” vs. “bad” news in the FFO reporting. Third, we find direct evidence that more powerful CEOs are indeed associated with higher FFO adjustments, suggesting CEOs’ involvement in hiding subpar performance. Finally, we focus our attention in a more recent period, when the National Association of Real Estate Investment Trusts (NAREIT) provides additional clarifications and guidelines, and the U.S. Securities and Exchange Commission (SEC) increases scrutiny on FFO reporting. Our results show a diminished “manipulation” for the majority of the REITs, suggesting these guidelines and scrutiny have achieved the intended purposes. While non-GAAP performance measures might supply additional information to investors, our results indicate that providing continuous guidance and monitoring is essential.

Keywords: REITs, Funds from Operations, CEO power

JEL Classification: G10

Suggested Citation

Feng, Zhilan and Lin, Zhilu and Wu, Wentao, CEO Influence on Funds from Operations (FFO) Adjustment for Real Estate Investment Trusts (REITs) (May 3, 2020). Available at SSRN: https://ssrn.com/abstract=3591764 or http://dx.doi.org/10.2139/ssrn.3591764

Zhilan Feng (Contact Author)

Clarkson University ( email )

United States

Zhilu Lin

Clarkson University - Department of Economics and Finance ( email )

Potsdam, NY 13699
United States

Wentao Wu

Clarkson University ( email )

United States

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