The Effect of Increased Transparency on Manipulation and Value Relevance of Non-GAAP Disclosures by Real Estate Investment Trusts (REITs)

Abstract

This paper examines whether industry efforts to increase uniformity and improve transparency of a non-GAAP performance measure change manager behavior and market perceptions. We find that the frequency of REITs meeting or beating analysts' expectations of funds from operations (FFO) decreased following explicit industry initiatives to discourage manipulation. Concurrent with this shift, 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 industry guidance about non-GAAP performance curtailed managers' opportunistic reporting. Furthermore, the market response to FFO is consistent with investors perceiving less manipulation and greater reliability. We also provide evidence supporting the SEC's requirement for reconciling non-GAAP disclosures with GAAP measures.