Manipulation, Increased Transparency, and Value Relevance of Non-Gaap Disclosures for Real Estate Investment Trusts (Reits)

Posted: 26 Sep 2005

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

Date Written: September 20, 2005

Abstract

The Securities and Exchange Commission (SEC) has expressed concerns that managers may manipulate non-GAAP performance measures in an effort to mislead investors. Consistent with this concern, we find that the frequency of REITs meeting (failing to meet) analysts' expectations of funds from operations (FFO) by a relatively small amount decreased (increased) following industry and SEC efforts to discourage manipulation and improve transparency of non-GAAP measures. Corresponding to this, we find that the value relevance of FFO to investors increased, particularly for firms reporting a reconciliation of FFO with GAAP earnings. Collectively, our results suggest that investors recognize the potential for manipulation in non-GAAP performance measures and condition their response to its perceived reliability. We also provide evidence supporting the SEC's requirement for reconciling non-GAAP disclosures with GAAP measures.

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

JEL Classification: M41, L85, G14

Suggested Citation

Baik, Bok and Billings, Bruce K. and Morton, Richard M., Manipulation, Increased Transparency, and Value Relevance of Non-Gaap Disclosures for Real Estate Investment Trusts (Reits) (September 20, 2005). AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=811427

Bok Baik (Contact Author)

Seoul National University ( email )

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

Bruce K. Billings

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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