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Reits’ Price Reaction to Unexpected FFO Announcements

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Abstract

This study examines the reaction of REIT prices to unexpected FFO announcements. Using both the traditionally constrained models and an unconstrained model, we find that the market reacts significantly when REITs announce unexpected FFO with a stronger response for positive than negative surprises. Also, we find that FFO explains significantly more variance in abnormal returns than net income supporting our conjecture that FFO, being more accurately reflective of cash flow, provides more useful information to investors than traditional GAAP measures. Our results are robust to different specifications. The results also suggest that the traditional approaches have been misspecified.

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Notes

  1. FFO is a non-GAAP performance metric introduced by the National Association of Real Estate Investment Trusts (NAREIT) in 1991.

  2. In 2003, the SEC introduced Regulation G, which requires firms to show a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP measure.

  3. A number of different deflators have been used to standardize the unexpected earning. These include share price (Cornell and Landsman 1989; Freeman and Tse 1992); or standard deviation of analyst forecasts (Datta and Dhillon 1993).

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Acknowledgements

The authors wish to thank Professor Geoffrey Turnbull, Professor Kevin Clarke and the anonymous referees to this journal who have greatly contributed to this paper.

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Correspondence to Alan J. Ziobrowski.

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Gyamfi-Yeboah, F., Ziobrowski, A.J. & Lambert, L.S. Reits’ Price Reaction to Unexpected FFO Announcements. J Real Estate Finan Econ 45, 622–644 (2012). https://doi.org/10.1007/s11146-010-9291-y

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