The Prevalence and Validity of EBITDA as a Performance Measure

59 Pages Posted: 15 May 2018 Last revised: 3 Nov 2018

See all articles by Arnt Verriest

Arnt Verriest

EDHEC Business School

Jan Bouwens

Amsterdam Business School

Ties de Kok

Tilburg University - Center and Faculty of Economics and Business Administration

Date Written: June 11, 2018

Abstract

This study evaluates EBITDA as a financial performance measure and investigates the use of EBITDA in financial reporting. First, we take issue with recent comments that both the SEC and the IASB have levied against non-GAAP earnings numbers, and in particular EBITDA. While EBITDA allegedly provides an accurate reflection of the operations and abstracts from how assets are financed, we argue that (net) operating profit already provides this information without the necessity of making subjective adjustments. Also, our evidence suggests that EBITDA paints a rosy picture of the firm’s profitability and cash-generating ability. Next, using textual analysis, we investigate the prevalence of EBITDA in financial disclosures based on a large sample of 15,895 annual reports and 51,758 earnings releases from S&P 1500 firms between 2005 and 2016. We find that 14.8% of sample firms disclose and emphasize EBITDA numbers. EBITDA disclosures modestly increase over time and tend to be rather sticky in nature. In our cross-sectional analyses, we find that, consistent with our hypotheses, EBITDA-reporting firms are smaller, more leveraged, more capital-intensive, less profitable and have longer operating cycles than non-EBITDA reporting firms. They also exhibit higher forecast errors and a higher likelihood of missing the analyst forecast benchmark. Additional tests further underscore the opportunistic nature of EBITDA disclosures as we find that these firm characteristics are more strongly associated with the disclosure of adjusted EBITDA measures, and less strongly associated with the disclosure of EBITA and EBIT.

Keywords: EBITDA Nongaap Measures

Suggested Citation

Verriest, Arnt and Bouwens, Jan and de Kok, Ties, The Prevalence and Validity of EBITDA as a Performance Measure (June 11, 2018). Available at SSRN: https://ssrn.com/abstract=3171131 or http://dx.doi.org/10.2139/ssrn.3171131

Arnt Verriest (Contact Author)

EDHEC Business School ( email )

Av Gustave Delory 24
Roubaix, DC 59057
France

Jan Bouwens

Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 5258740 (Phone)

Ties De Kok

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

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