Article2000

Cash Flows vs. Earnings in the Valuation of Equity REITs

45 citations0/0 files storedJournal of Real Estate Portfolio Management

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Financial Reporting and Valuation Research Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

Executive Summary. This article examines the incremental information content of net income and cash flows for equity real estate investment trusts (REITs). REITs provide a natural setting for investigating which measure, earnings or cash flows, provides a better summary statistic of corporate value. No formal empirical analysis has been conducted for REITs however, and existing research for public firms in general provides mixed results.Using three alternative models, we find funds from operations (FFO) has a higher information content than net income, and contains incremental information beyond that contained in net income. Our results support the usefulness of the FFO measure for REITs.

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References

1968An Empirical Evaluation of Accounting Income Numbers 1995Price and return models 1986The Association of Operating Cash Flow and Accruals with Security Returns 1986The Relative Information Content of Accruals and Cash Flows: Combined Evidence at the Earnings Announcement and Annual Report Release Date 1989Real Estate Finance and Investments 1995The Historical Performance of Real Estate Investment Trusts

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2012Manipulation in U.S. REIT Investment Performance Evaluation: Empirical Evidence 2004The Relevance of Earnings and Funds Flow from Operations in the Presence of Transitory Earnings

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