Beyond earnings: do EBITDA reporting and governance matter for market participants?

Abstract

Purpose The purpose of this paper is to investigate whether formally disclosing an earnings before interests, taxes, depreciation, and amortization (EBITDA) number reduces the information asymmetry between managers and investors beyond the release of GAAP earnings. The paper also assess if EBITDA disclosure enhances the value relevance and the predictive ability of earnings. Design/methodology/approach The authors explore the interface between GAAP and non-GAAP reporting as well as the impact of corporate governance on the quality of non-GAAP measures. Findings Results suggest that EBITDA reporting is associated with greater analyst following and with less information asymmetry. The authors also document that EBITDA reporting enhances the positive relationship between earnings and stock pricing as well as future cash flows. Moreover, it appears that corporate governance substitutes for EBITDA reporting for stock markets. Hence, EBITDA helps market participants to better assess earnings valuation when a firm’s governance is weak. Inversely, when governance is strong, releasing EBITDA information has a much smaller impact on the earnings-stock price relation. Originality/value The authors revisit the issue of how corporate governance relates with earnings quality by considering the potentially confounding effect of EBITDA reporting; it appears that such reporting substitutes for governance in moderating the relation between governance and earnings quality.

The Relevance of XBRL Voluntary Disclosure for Stock Market Valuation: The Role of Corporate Governance

“…Based on a Canadian sample, results suggest that EBITDA reporting is associated with greater analyst following and with less information asymmetry. Cormier et al () also document that EBITDA reporting enhances the positive relationship between earnings and stock market pricing as well as future cash flows. Moreover, it appears that corporate governance substitutes for EBITDA reporting for stock market pricing.…”

“…In a recent paper, Cormier, Demaria and Magnan () investigate whether voluntarily disclosing of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), a well‐known non‐GAAP measure, reduces the information asymmetry between managers and investors beyond the release of GAAP earnings, and enhances the value relevance and the predictive ability of earnings. Based on a Canadian sample, results suggest that EBITDA reporting is associated with greater analyst following and with less information asymmetry.…”

Endividamento e decisões contábeis: a relação não linear entre dívida e qualidade dos lucros

“…A literatura apresenta evidências de que a qualidade do resultado pode depender de fatores como o nível de governança e o desempenho operacional (Chiang, Kleinman, & Lee, 2017), as expectativas de mercado (Cormier, Demaria, & Magnan, 2017), o nível de dívida (Bharath et al,2008), dentre outros. Em todas essas análises, na presença de gerenciamento de resultados via discricionariedade dos lucros, verifica-se um aumento dos custos para a empresa associados à diminuição da qualidade dos lucros e de sua capacidade em prever alterações futuras do fluxo de caixa (Dechow et al, 2010).…”

The association between EBITDA reconciliation quality and opportunistic disclosure

“…Using a sample of 233 Canadian listed companies from 2012 to 2013, Cormier et al (2017) provided evidence that EBITDA provides the market with incremental information. Suggesting that EBITDA lowers information asymmetry, Cormier et al (2017) found that companies that disclosed EBITDA had lower bid-ask spreads and lower analyst forecast dispersion.…”

“…Using a sample of 233 Canadian listed companies from 2012 to 2013, Cormier et al (2017) provided evidence that EBITDA provides the market with incremental information. Suggesting that EBITDA lowers information asymmetry, Cormier et al (2017) found that companies that disclosed EBITDA had lower bid-ask spreads and lower analyst forecast dispersion. In addition, Cormier et al (2017) also found that EBITDA was positively associated with companies' share prices and future cash flow, suggesting that EBITDA also provides value relevant information (2017).…”