Earnings management in U.S. equity REITs

Abstract

This study addresses two questions: whether there is earnings management in the REIT industry and how earnings management practices are affected by firm-specific factors. Capital market-related incentives for financial results manipulation can be divided into two types: specific event-driven and benchmark-driven. Both types of incentives are examined in this study. With regards to the first case, seasoned equity offering (SEO) is selected as the specific event. In the second case, Zero earnings/FFO and zero growth in earnings/FFO are chosen as the two benchmarks. Clear evidence of FFO manipulation around SEOs is found, but the extent of earnings management is relatively weaker than that in industrial firms. It is found that REITs that issue SEOs more often are more aggressive in manipulating FFO and less so in managing earnings. Moreover, there is a notable difference between these two types of financial results manipulation. A mean-reversion trend is found in discretionary accruals, but not for FFO manipulation.