The application of EBITDA for performance measurement, and factors influencing it

Abstract

This thesis is based on firm observations from Oslo Børs in the period from 2011 to 2015, and studies the use of EBITDA in the firms’ annual reports and if there are any factors influencing this use. We apply the modified Jones model to estimate earnings management through accruals, and use this to generate a variable for earnings management which we insert into a multiple linear regression model for measuring the use of EBITDA. However, we found inconclusive results about earnings management and the use of EBITDA. Further, we examine other factors that we expected to have an influence on EBITDA. We found evidence that firm size and decreasing cash flow were significantly different from zero at the 1% level (99% confidence interval) and 10% level (90% confidence interval) respectively, suggesting that these variables do affect the use of EBITDA in the annual reports. The remaining factors did not provide any evidence towards the use of EBITDA in the annual reports (financial reporting). However, we assess the tendencies in conjunction with our hypotheses regarding prior expectations. Furthermore, we see that the different sectors explain approximately 10% of the total variation in the regression model. We experience that the use of EBITDA or other pro forma earnings measures vary between firms but also for a firm from year to year. Further, it is unclear what EBITDA contains, making it difficult to interpret and compare with other firms’ EBITDA.