Investigating the association between the reconciliation quality of EBITDA disclosure by JSE-listed companies and factors associated with opportunistic disclosure

Mey, Mattheus Theodorus (2019-04)

Thesis (MAcc)--Stellenbosch University, 2019.

Thesis

ENGLISH SUMMARY : This study sought to determine whether the Johannesburg Stock Exchange (JSE) and the International Accounting Standards Board (IASB) should specify explicit disclosure requirements regarding the format of reconciliations between adjusted International Financial Reporting Standards (IFRS) earnings, referred to as non-GAAP earnings, and IFRS earnings. The disclosure of non-GAAP earnings is linked to both decision-usefulness and earnings management. As a form of earnings management, company management may disclose non-GAAP earnings in such a manner as to influence users’ perceptions of company performance in order to attain their own opportunistic goals. If reconciliations between non-GAAP earnings and IFRS earnings are of a high quality, the risk of opportunistic disclosure is limited and decision-useful information enabled. Focusing on earnings before interest, tax, depreciation and amortisation (EBITDA), the following research question was addressed: Are companies less likely to disclose higher quality reconciliations between EBITDA and IFRS earnings when factors linked to opportunistic disclosure are present? The quality of reconciliations between EBITDA and IFRS earnings, as included in the Stock Exchange News Service (SENS) reports of JSE-listed companies for the financial years 2014 to 2016, were determined. Ordinary least squares estimation was used to regress the EBITDA reconciliation score on three factors linked to opportunistic disclosure, namely: whether greater emphasis is placed on EBITDA than IFRS earnings; whether EBITDA is positive when IFRS earnings are negative; and whether invalid adjustments were made in deriving EBITDA. The results showed that higher reconciliation quality is negatively associated with instances where companies reported a positive EBITDA when IFRS earnings were negative. This potentially opportunistic use of poorly reconciled information provides support for the establishment of explicit disclosure requirements to enhance decision-useful disclosure. However, the association between reconciliation quality and the remaining two opportunistic factors, that is, when EBITDA is emphasised and when invalid adjustments are made in deriving EBITDA, was positive and indicates that management had disclosed decision-useful information through higher quality reconciliations when those two factors were present. In addition, the study found great diversity in how companies define EBITDA and also that the quality of EBITDA reconciliations in many SENS reports was lacking. This study contributes to the limited body of research on non-GAAP disclosure by South African companies. It also contributes to the voluntary disclosure literature by focusing on a non-GAAP earnings measure that has been largely ignored by prior studies, namely EBITDA. The findings may be of interest to the JSE in maintaining high quality corporate disclosure and may also have policy implications for the IASB which is involved in a disclosure initiative to improve presentation and disclosure in financial reports.

AFRIKAANSE OPSOMMING : Hierdie studie is onderneem om te bepaal of die Johannesburgse Effektebeurs (‘JSE’) en die International Accounting Standards Board (‘IASB’) eksplisiete openbaarmakingsvereistes rakende die formaat van rekonsiliasies tussen aangepaste Internasionale Finansiële Verslagdoeningstandaarde (‘IFRS’) verdienste, verwys na as nie-AARP verdienste, en IFRS verdienste moet spesifiseer. Die openbaarmaking van nie-AARP verdienste word gekoppel aan beide besluitnemingsnut en verdienstebestuur. As ‘n vorm van verdienstebestuur kan maatskappybestuur nie-AARP verdienste op so ‘n wyse openbaar wat gebruikers se siening van die prestasie van ‘n maatskappy beïnvloed ten einde bestuur se eie opportunistiese doelwitte te verwesenlik. Indien rekonsiliasies tussen nie-AARP verdienste en IFRS verdienste van ‘n hoë kwaliteit is, word die risiko van opportunistiese openbaarmaking beperk en besluitnemingsnuttigheid gefasiliteer. Deur die fokus te plaas op verdienste voor rente, belasting, waardevermindering en amortisasie (‘EBITDA’) is die volgende navorsingsvraag aangespreek: Is dit minder waarskynlik dat maatskappye hoër kwaliteit rekonsiliasies tussen EBITDA en IFRS verdienste verskaf, indien faktore wat gekoppel is aan opportunistiese openbaarmaking teenwoordig is? Die kwaliteit van rekonsiliasies tussen EBITDA en IFRS verdienste, soos ingesluit in die SENS-verslae van JSE-genoteerde maatskappye vir die finansiële jare 2014 tot 2016, is bepaal. Die ‘ordinary least squares’ beramingsmetode is gebruik om ‘n regressie uit te voer tussen die EBITDA rekonsiliasietelling en drie faktore wat gekoppel is aan opportunistiese openbaarmaking, naamlik: of groter klem geplaas is op EBITDA as IFRS verdienste; of EBITDA positief was toe IFRS verdienste negatief was; en of ongeldige aanpassings gemaak is by die vasstelling van EBITDA. Die resultate het getoon dat hoër rekonsiliasiekwaliteit ‘n negatiewe verwantskap gehad het met gevalle waar maatskappye ‘n positiewe EBITDA geopenbaar het terwyl IFRS verdienste negatief was. Hierdie potensiële opportunistiese gebruik van swak gerekonsilïeerde inligting verskaf ondersteuning vir die daarstelling van eksplisiete openbaarmakingsvereistes ten einde besluitnemingsnuttige openbaarmaking te bevorder. In teenstelling daarmee, was die verwantskap tussen die rekonsiliasiekwaliteit en die oorblywende twee faktore, dit wil sê, of EBITDA beklemtoon is en of ongeldige aanpassings gemaak is om EBITDA te bereken, positief. Hierdie positiewe verwantskap dui daarop dat, toe daardie twee faktore aanwesig was, bestuur deur die gebruikmaking van hoër kwaliteit rekonsiliasies besluitnemingsnuttige inligting aangebied het. Verder het die studie ook bevind dat daar groot verskille is tussen hoe maatskappye EBITDA definïeer en ook dat die kwaliteit van EBITDA rekonsiliasies in baie SENS-verslae tekortskiet. Hierdie studie dra by tot die beperkte literatuur oor nie-AARP openbaarmaking by Suid-Afrikaanse maatskappye. Dit dra ook by tot die vrywillige openbaarmakingsliteratuur deur te fokus op ‘n nie-AARP verdienstemaatstaf wat grotendeels deur vorige studies geïgnoreer is, naamlik EBITDA. Die bevindinge mag vir die JSE van belang wees om hoë kwaliteit korporatiewe verslagdoening te handhaaf en dit mag ook beleidsimplikasies hê vir die IASB wat besig is met ‘n openbaarmakingsinisiatief ten einde aanbieding en openbaarmaking in finansiële verslae te verbeter.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/105602
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