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

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