Management of performance measures other than earnings: Evidence from the REIT industry

Previous studies on earnings management provide mounting evidence that reported earnings are managed for several reasons. However, in certain industries, performance measures other than earnings have become more widely accepted. For example, Funds from Operations (FFO), as opposed to net income, has become a widely accepted standard measure of operating performance in the Real Estate Investment Trust (REIT) industry. In this study I investigate the incentives of REIT managers to manage FFO. Specifically, I attempt to link management of FFO to REIT managers' incentives: to maximize their compensation, to meet or beat analysts' forecasts, and to meet or beat the prior year's reported FFO. My results show that REIT managers do use discretion to help meet or beat analysts' forecasts and the prior year's reported FFO. However, my results do not suggest that the use of discretion is associated with the incentive to maximize REIT managers' cash bonuses. I also examine whether management of FFO affects the informativeness of FFO relative to the earnings numbers. My results show that FFO per share outperforms EPS in explaining the security returns of REITs that report FFO less aggressively, but not those that report FFO more aggressively.