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Although CEO bonus plans traditionally use net income as the standard performance measure, there is an increasing trend that CEOs influence directors to adopt alternative non-GAAP performance metrics in setting bonuses. In this study, we analyze the managerial consequences of this alternative bonus contract design in the Real Estate Investment Trusts (REITs) industry. REITs provide a unique setting since most firms have been using FFO, an industry-specific non-GAAP performance measure, rather than net income, to determine CEO bonuses. Essentially, FFO consists of two components: net income, which is a GAAP measure, and a non-GAAP component that includes adjustments from net income made by firms. We examine to what extent CEO bonus arises as the result of manipulating these components. We also examine whether regulatory standards related to non-GAAP reporting and bonus disclosures are effective in mitigating such manipulation. Lastly, we analyze if good corporate governance constrains managerial opportunistic behavior. Our findings show, when given a choice to manipulate a GAAP versus a non-GAAP component, firms primarily choose to manage the non-GAAP component to increase bonuses. We further show that regulatory compensation disclosure standards and good governance mechanisms are important in reducing such manipulation. In additional analysis, we find that firms report less manipulation for bonus purposes in the post-financial crisis period, and CEO bonuses are higher at firms that report positive manipulations. Moreover, we do not find any association between FFO manipulation and other forms of compensation that are not directly linked to the FFO measure in compensation contract design. Finally, we show that capital market participants penalize firms’ manipulative activities on FFO, especially when such activities are accompanied by large CEO bonuses.


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