Non-GAAP reporting and capital markets: contrasting France and Canada

Purpose - This study aims to assess if the voluntary reporting of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), a widely used non-generally accepted accounting principles (GAAP) measure, has effects on information asymmetry and value relevance and how the adjustments to GAAP earnings made to derive it contribute to these effects. This study focuses on firms from two countries with contrasting institutional settings, Canada and France. Design/methodology/approach - Relying on multivariate analyses and using Heckman’s procedure to address the sample self-selection issue, this study first estimates the likelihood of a firm to report adjusted EBITDA. Then, this study examines if adjusted EBITDA, as well as the adjustments made to GAAP earnings to derive adjusted EBITDA (adjustments), affect a firm’s information asymmetry and its value. These adjustments are essentially GAAP-grounded items that are discarded by management to derive non-GAAP adjusted EBITDA. The dependent variables are share price volatility, as a proxy for information asymmetry, alongside market-to-book and stock market return as indicators of value. Findings - In terms of the used sample, results suggest that Canadian firms are much more likely to report adjusted EBITDA than French firms. Chief executive officer (CEO) attributes (CEO power) appears to increase such likelihood. Moreover, for both Canadian and French firms, adjusted EBITDA is associated with reduced stock market volatility, an indication of lower information asymmetry, as well as higher market-to-book and returns, suggesting value relevance. The results also indicate that investors view the adjustments to GAAP earnings made by management to derive adjusted EBITDA as not value relevant (similar to noise). The GAAP-grounded elements that management discard to derive adjusted EBITDA actually increase information asymmetry. Originality/value - This study adds to prior research on the interface between a CEO attributes and governance and non-GAAP reporting. This study also provides evidence that, despite very different institutional settings, non-GAAP reporting conveys relevant information to capital markets’ participants in both France and Canada. Hence, a country’s institutional setting may have a differential impact on the disclosure choice but not on the resulting value relevance of such disclosure. Finally, this study extends the non-GAAP literature by examining the value relevance of a widely used yet under-researched measure, adjusted EBITDA.