Review of Accounting Studies

, Volume 3, Issue 1–2, pp 103–130

An Empirical Evaluation of the Usefulness of Non-GAAP Accounting Measures in the Real Estate Investment Trust Industry

  • Thomas D. Fields
  • Srinivasan Rangan
  • S. Ramu Thiagarajan


We conduct three sets of analyses to compare the usefulness of net income, based on generally accepted accounting principals (GAAP), and the industry-advanced funds from operations (FFO) in the context of the real estate investment trust (REIT) industry. In our first set of tests, we find that FFO is more strongly associated with one-year ahead FFO and one-year ahead operating cash flows than is net income. Conversely, we find that net income explains more variation in one-year ahead net income and current stock price than does FFO. Second, in support of the claim that some REITs manipulate FFO, we document that young REITs and REITs that are likely to access capital markets are more likely to manage FFO. Third, we find that, for a sample of firms that disclose current value information, both net income and FFO fail to reflect holding gains or losses on unsold properties in a timely manner. Overall, our analyses suggest that the REIT industry's claim that FFO is more useful than net income is premature because the superiority of one measure over the other is highly contextual.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. American Institute of Certified Public Accountants. (1995). Proposed Statement of Position: Reporting of Real Estate Companies of Supplemental Current Value Information. New York, NY: American Institute of Certified Public Accountants.Google Scholar
  2. Amir, E., and B. Lev. (1996). “Value-Relevance of Nonfinancial Information: The Wireless Communications Industry.” Journal of Accounting & Economics 22, 3–30.Google Scholar
  3. Arnold, A. L., and D. Goscicki. (1995). “Current Value Reporting by Real Estate Companies.” Mortgage and Real Estate Executives Report 28, 5.Google Scholar
  4. Barth, M., and G. Clinch. (1998). “Revalued Financial, Tangible, and Intangible Assets: Associations with Share Prices and Non-market-based Value Estimates.” Working paper, Stanford University.Google Scholar
  5. Belsley, D. A., E. Kuh, and R. E. Welsch. (1980). Regression Diagnostics: Identifying Influential Data and Sources of Collinearity. New York, NY: John Wiley and Sons.Google Scholar
  6. Bowen, R. M., D. Burgstahler, and L. A. Daley. (1986). “Evidence on the Relationships Between Earnings and Various Measures of Cash Flow.” Accounting Review 61, 713–725.Google Scholar
  7. Brenner, M. J. (1984). “Real Estate Financial Reporting: User's Perspective.” CPA Journal 54, 32–35.Google Scholar
  8. Christie, A. (1987). “On Cross-Sectional Analysis in Accounting Research.” Journal of Accounting & Economics 9, 231–258.Google Scholar
  9. Damodoran A., and C. H. Liu. (1993). “Insider Trading as a Signal of Private Information.” Review of Financial Studies 6, 79–119.Google Scholar
  10. Dechow, P. M. (1994). “Accounting Earnings and Cash Flows as Measures of Firm Performance: The Role of Accounting Accruals.” Journal of Accounting & Economics 18, 3–42.Google Scholar
  11. Dechow, P. M., R. G. Sloan, and A. P. Sweeney. (1996). “Causes and Consequences of Earnings Manipulations: An Analysis of Firms Subject to Enforcement Actions by the SEC.” Contemporary Accounting Research 13, 1–36.Google Scholar
  12. Dorfman, R. R. (1990). “Real Estate Trouble Spills Over as Worried Investors Shun REITs.” Wall Street Journal January 5, C1-C2.Google Scholar
  13. Downs, A. (1991). “Appraisal Practices Need Revision.” Appraisal Journal 59, 454–457.Google Scholar
  14. Easton, P. D., P. H. Eddey, and T. S. Harris. (1995). “An Investigation of Revaluations of Tangible Long-Lived Assets.” Journal of Accounting Research 31(Suppl), 1–38.Google Scholar
  15. Easton, P. D., T. S. Harris, and J. A. Ohlson. (1992). “Aggregate Accounting Earnings Can Explain Most of Security Returns: The Case of Long Return Intervals.” Journal of Accounting & Economics 15, 119–142.Google Scholar
  16. Edmunds, J. C. (1982). “Why REIT Stocks are Undervalued.” Real Estate Review 12, 96–99.Google Scholar
  17. Fass, P. M., M. E. Schaff, and D. B. Zief. (1996). Real Estate Investment Trusts Handbook. New York, NY: Clark, Boardman, and Callaghan.Google Scholar
  18. Financial Accounting Standards Board. (1980). Statement of Financial Accounting Concepts No. 2. Stamford, CT: Financial Accounting Standards Board.Google Scholar
  19. Financial Accounting Standards Board. (1981). Reporting Income, Cashflows, and Financial Position of Business Enterprises. Exposure draft. Stamford, CT: Financial Accounting Standards Board.Google Scholar
  20. Fisher, J. D. (1994). “Alternative Measures of Real Estate Performance: Exploring the Russell-NCREIF Data Base.” Real Estate Finance 11, 79–87.Google Scholar
  21. Francis, J., J. D. Hanna, and L. Vincent. (1996). “Causes and Effects of Discretionary Asset Write-Offs.” Journal of Accounting Research 34(Suppl), 117–134.Google Scholar
  22. Frees, E. W. (1995). “Assessing Cross-Sectional Correlation in Panel Data.” Journal of Econometrics 69, 393–414.Google Scholar
  23. Gallant, R. A. (1987). Nonlinear Statistical Models. New York, NY: John Wiley and Sons.Google Scholar
  24. Greenberg, R. R., G. L. Johnson, and K. Ramesh. (1986). “Earnings Versus Cash Flows as a Predictor of Future Cash Flows.” Journal of Accounting, Auditing and Finance 1, 266–277.Google Scholar
  25. Hamilton, J. D. (1994). Time Series Analysis. Princeton, NJ: Princeton University Press.Google Scholar
  26. Hawkins, D. F. (1998). Corporate Financial Reporting and Analysis: Text and Cases. New York, NY: Irvin/Mcgraw Hill.Google Scholar
  27. Heckman, J. J. (1979). “Sample Selection Bias as a Specification Error.” Econometrica 47, 153–161.Google Scholar
  28. Hodges, M. B. (1993). “Three Approaches.” Appraisal Journal 61, 553–564.Google Scholar
  29. Jennings, R., J. Robinson, R. B. Thompson, and L. Duvall. (1996). “The Relation Between Accounting Goodwill Numbers and Equity Values.” Journal of Business, Finance, and Accounting 23, 513–533.Google Scholar
  30. Judge, G. G., R. C. Hill, W. E. Griffiths, H. Lukepohl, and T. Lee. (1988). Introduction to the Theory and Practice of Econometrics. New York, NY: John Wiley and Sons.Google Scholar
  31. Kothari, S. P., and J. L. Zimmerman. (1995). “Price and Return Models.” Journal of Accounting & Economics 20, 155–192.Google Scholar
  32. Lipe, R. C. (1986). “The Information Contained in the Components of Earnings.” Journal of Accounting Research 24(Suppl), 37–64.Google Scholar
  33. Martin, E. J. (1995). “Truth or Consequences.” Institutional Investor 29, 113–116.Google Scholar
  34. National Association of Real Estate Investment Trusts. (1991). White Paper on Funds from Operations. Washington, D.C.: National Association of Real Estate Investment Trusts.Google Scholar
  35. National Association of Real Estate Investment Trusts. (1995). White Paper on Funds from Operations. Washington, D.C.: National Association of Real Estate Investment Trusts.Google Scholar
  36. Ohlson, J. A. (1995). “Earnings, Book Values, and Dividends in Equity Valuation.” Contemporary Accounting Research 11, 661–687.Google Scholar
  37. Palmon, D., and L. J. Seidler. (1978). “Current Value Reporting of Real Estate Companies and a Possible Example of Market Inefficiency.” Accounting Review 53, 776–790.Google Scholar
  38. Schwarzbach, H., and R. Vangermeersch. (1991). “The Current Value Experiences of The Rouse Company, 1973–1989.” Accounting Horizons 5, 45–54.Google Scholar
  39. Searfoss, D. G., and J. F. Weiss. (1990). “Current Value Reporting for Real Estate.” Journal of Accountancy 170, 69–75.Google Scholar
  40. Swanson, E. P., and F. Niswander. (1992). “Voluntary Current Value Disclosures in the Real Estate Industry.” Accounting Horizons 6, 49–61.Google Scholar
  41. Templin, N. (1996). “Analysts Scrutinize Accounting Tactic Boosting REITs.” Wall Street Journal January 23, C1.Google Scholar
  42. Tishman Realty & Construction Company. (1977). Prospectus.Google Scholar
  43. Vincent, L. (1998). “The Information Content of Funds from Opertions for Real Estate Investment Trusts.” Working paper, University of Chicago.Google Scholar
  44. Vinocur, B. (1995). “The Ground Floor: REITs' Earnings GAAP.” Barron's 75, 36.Google Scholar
  45. Vuong, Q. H. (1989). “Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses.” Econometrica 57, 307–333.Google Scholar
  46. Watts, R. L., and J. L. Zimmerman. (1986). Positive Accounting Theory. Englewood Cliffs, N.J.: Prentice Hall.Google Scholar
  47. Weingarten Realty Investors. (1995). Form 10-K.Google Scholar
  48. Zani, W. M. (1993). “A Current Value Measure for Corporate Real Estate.” Real Estate Review 23, 44–49.Google Scholar

Copyright information

© Kluwer Academic Publishers 1998

Authors and Affiliations

  • Thomas D. Fields
    • 1
  • Srinivasan Rangan
    • 2
  • S. Ramu Thiagarajan
    • 1
  1. 1.J. L. Kellogg Graduate School of ManagementNorthwestern UniversityEvanston
  2. 2.University of California-DavisDavis

Personalised recommendations