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This study investigates whether the EBITDA metric is incrementally informative beyond GAAP earnings and/or Pro forma earnings by analyzing a sample of 181,677 firm-quarters over the period from 2000 to 2013. Our investigation of short-window market reaction around earnings announcement reveals that EBITDA earnings are incrementally informative beyond not only GAAP earnings but also Pro forma earnings. The evidence also suggests that market participants find disclosures of the EBITDA metric incrementally useful for equity pricing. Additional evidence indicates that EBITDA and Pro forma earnings are complementary, in the sense that EBITDA and Pro forma earnings strengthen the value relevance of each other. Finally, investor response to both EBITDA and Pro forma earnings is stronger when firms make an effort to inform investors, but is weaker when firms show greater tendency to mislead investors.
Sok-Hyon Kang, George Washington University
Joon Seok Moon, George Washington University
Oded Rozenbaum, George Washington University
Zinan Zhu, National University of Singapore