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Comparing the Quality of Accruals for GAAP vs. Non-GAAP Summary Performance Measures in Financial Reporting
Desmond Tsang,
McGill University
ABSTRACT. This paper provides evidence on whether industry-regulated, yet non-GAAP performance measures may be of higher quality than net income by specifically examining the quality of accruals in Funds from Operations, the non-GAAP performance measure used in the REIT industry. Accruals quality is empirically evaluated from regressions relating accruals to past, present, future cash flows, and changes in revenue, with larger residuals implying lower accruals quality. I find that the accruals component of FFO is of higher quality than the accruals component of net income and the results are robust to different model specifications. The study then examines whether the accruals components of FFO and net income and the quality of these accruals are factored into pricing.I find that both the components and quality of FFO accruals is positively related to stock prices.
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