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.

Studies in the capital market context indicate that earnings changes and earnings levels considered jointly provide a more comprehensive representation of unexpected earnings than either earnings changes or earnings levels considered alone. Recent studies of executive compensation demonstrate that executive compensation revisions are greater when earnings innovations are permanent, than when innovations are transitory. Together, these literatures imply that both earnings changes and earnings levels explain revisions to CEO compensation. Specifically, formal analysis implies that weights on earnings changes vary directly with the persistence of earnings innovations and that weights on earnings levels vary directly with persistence for low persistence observations and inversely with persistence for high persistence observations. Evidence for compensation to 712 executives of U.S. corporations is consistent with these expectations. Such results suggest that earnings levels, earnings changes, and earnings persistence need to be considered when investigating relations between accounting earnings and executive compensation.

This study presents conceptual and empirical analyses of discretionary accrual reversal in the earnings management context. We specifically focus on the extent that income-increasing (decreasing) discretionary accruals initiated in a prior period reverse to become income-decreasing (increasing) accruals in the current period. The analysis suggests that the extent that such reversals constrain the ability to manage toward earnings objectives depends on both the magnitude of past accrual-based earnings management and the reversal speed of past discretionary accruals. To demonstrate the empirical implications of the analysis, we consider discretionary accrual reversal speed as an additional determinant of the balance sheet constraint on earnings management (Barton and Simko 2002). We show that, conditional on the magnitude of net operating asset overstatement, the probability of achieving quarterly earnings forecasts varies inversely with reversal speed.