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Accounting Review


funds from operations; REIT; value relevance; accounting depreciation; economic


  1. Sok-Hyon Kang
  2. Yuping Zhao




    Funds from Operations (FFO) is the prevailing performance measure in
    the Real Estate Investment Trust (REIT) industry. However, prior studies are inconclusive
    about the superiority of FFO over GAAP net income. Because depreciation is the largest
    reconciling item between FFO and net income, we examine the information content
    and value relevance of depreciation for both the REIT and non-REIT industries and
    report the following findings. First, accumulated depreciation is value-relevant for the
    REIT industry, whereas accumulated depreciation has little value relevance for comparably
    capital-intensive non-REIT industries. Second, accounting depreciation deviates
    from economic depreciation to a greater extent for REITs than for non-REIT industries.
    Third, accumulated depreciation has predictive ability for future revenues for
    REIT firms, but not for non-REIT firms. Finally, only the REIT industry displays all of
    these properties. In sum, evidence supports the REIT industry’s assertion that GAAP
    depreciation consistently exceeds economic depreciation and that book value of assets
    is systematically understated.


    Vol 85, Nomor 01, Tahun 2010


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