An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Vincent J Shea
Kent State University

Abstract: This paper examines the value relevance of net income and funds from operations (FFO) for REIT investors. Professional bodies, such as The National Association of Real Estate Investment Trusts (NAREIT) and Financial Accounting Standards Board (FASB), sharply differ in their preference for performance measurements specifically related to equity REITs. Whereas NAREIT advocates the FFO metric, the FASB states that the prominent use of FFO at the expense of GAAP net income may cause confusion for miscommunication to investors. Prior research in both the accounting and finance literatures has produced inconclusive results in this debate. This study adds to the literature by including more recent data over the period when real estate has received more attention by investors. The results of this study lend evidence that within the publicly traded equity REIT market, GAAP based earnings are a better predictor of abnormal returns than the arguably, more preferred FFO metric.

Back to Session Listing

AAA Home Page