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Conference Paper: The effect of industry business cycles on the information in pro-forma earnings: evidence from U.S. REITs

TitleThe effect of industry business cycles on the information in pro-forma earnings: evidence from U.S. REITs
Authors
KeywordsFunds from operations (FFO)
Accounting depreciation bias
Real estate cycles
Feltham and Ohlson (1996)
Issue Date2016
Citation
The 2016 Journal of Accounting, Auditing and Finance Conference, Lake Louise, Banff National Park, Canada, 27-29 June 2016, p. 1-50 How to Cite?
AbstractThis paper investigates whether the valuation of the cash flow and depreciation components of net income vary over time for Real Estate Investment Trusts (REITs). The estimated model derives from the Feltham and Ohlson [1996] (FO96) framework, reinterpreted for the REIT sector. We show how the interaction of model coefficients with a continuous measure of demand for real estate reveals time-varying persistence in cash flows from operations and investing (economic fundamentals), versus time-varying depreciation accounting bias (an accounting fundamental). Our empirical application of the model suggests, as expected, that the persistence of the cash flow component of earnings is pro-cyclical, while the depreciation bias component is counter-cyclical. This result is new to the literature. An implication of this finding is that changing valuation weights on depreciation expense leads to variability in the ability of summary measures, such as net income or funds from operations, to explain firm value. This implication is true whether an investor focuses on GAAP net income, or a pro-forma measure such as Funds From Operations (FFO).
Persistent Identifierhttp://hdl.handle.net/10722/230199

 

DC FieldValueLanguage
dc.contributor.authorBegley, JOY-
dc.contributor.authorChamberlain, S-
dc.contributor.authorJoo, JH-
dc.date.accessioned2016-08-23T14:15:41Z-
dc.date.available2016-08-23T14:15:41Z-
dc.date.issued2016-
dc.identifier.citationThe 2016 Journal of Accounting, Auditing and Finance Conference, Lake Louise, Banff National Park, Canada, 27-29 June 2016, p. 1-50-
dc.identifier.urihttp://hdl.handle.net/10722/230199-
dc.description.abstractThis paper investigates whether the valuation of the cash flow and depreciation components of net income vary over time for Real Estate Investment Trusts (REITs). The estimated model derives from the Feltham and Ohlson [1996] (FO96) framework, reinterpreted for the REIT sector. We show how the interaction of model coefficients with a continuous measure of demand for real estate reveals time-varying persistence in cash flows from operations and investing (economic fundamentals), versus time-varying depreciation accounting bias (an accounting fundamental). Our empirical application of the model suggests, as expected, that the persistence of the cash flow component of earnings is pro-cyclical, while the depreciation bias component is counter-cyclical. This result is new to the literature. An implication of this finding is that changing valuation weights on depreciation expense leads to variability in the ability of summary measures, such as net income or funds from operations, to explain firm value. This implication is true whether an investor focuses on GAAP net income, or a pro-forma measure such as Funds From Operations (FFO).-
dc.languageeng-
dc.relation.ispartofJournal of Accounting, Auditing and Finance Conference-
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectFunds from operations (FFO)-
dc.subjectAccounting depreciation bias-
dc.subjectReal estate cycles-
dc.subjectFeltham and Ohlson (1996)-
dc.titleThe effect of industry business cycles on the information in pro-forma earnings: evidence from U.S. REITs-
dc.typeConference_Paper-
dc.identifier.emailJoo, JH: jeongjoo@hku.hk-
dc.identifier.authorityJoo, JH=rp01796-
dc.description.naturepostprint-
dc.identifier.hkuros262721-
dc.identifier.hkuros263346-
dc.identifier.spage1-
dc.identifier.epage50-

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