Investigating How the Lack of Standardized Definitions for Metrics Like EBITDA Affects Comparability and Transparency

One of the main financial metrics that measure the income Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is the basis for its widespread use in corporate financial analysis.
This is due to the fact that, as a result of its method of calculation, it is seen as a reflection of the company's actual business performance if the effects of financing and accounting policy decisions and other associated losses are excluded. However, EBITDA is a non, GAAP (or non, IFRS) measure, which implies that there is no uniform accounting principle or strict regulatory supervision in its calculation. Due to the lack of standardization, companies have great freedom to decide which items to exclude or include, especially in the case of non, recurring, non, operating, or subjective “adjustments.”
Because of this, the effort to get EBITDA values that are consistent, comparable, and transparent across firms as well as in different time periods is very difficult.
Numerous empirical researches have come to the conclusion that the ways in which companies define EBITDA greatly differ, and most of the time these companies use different kinds of adjustments (for instance: restructuring charges, litigation costs, or stock, based compensation) without predefining the way they are going to do that (Pinto et al., 2019; Botha & Stainbank, 2020).
These discrepancies become obstacles for investors, analysts, and regulators challenging them to make right judgments or measures of genuine operational performance. Additionally, by the means of adjusted EBITDA, there is a danger that it will hide behind that mask the poor quality of earnings or trick the stakeholders if for example executive compensations are connected with performance indicators (Young, 2014).
Even though regulatory bodies like the U.S. Securities and Exchange Commission (SEC) and the International Accounting Standards Board (IASB) are making big efforts to require reconciliation and raise disclosure quality, the lack of an unambiguous single EBITDA definition still causes suspicions about earnings management and transparency. After that, the current work will delve deep into the consequences related to non, standardized reporting of EBITDA, pinpoint the risks of the market that are based on the crisis of trust, and offer practical suggestions to facilitate the comparability and disclosure of non, GAAP performance measures.

EBITDA, non-GAAP measures, earnings quality, financial disclosure

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