The Relationship Between Investment Intensity and Pro Tability Measures From The Perspective of Foreign Investors
The Relationship Between Investment Intensity and Pro Tability Measures From The Perspective of Foreign Investors
The Relationship Between Investment Intensity and Pro Tability Measures From The Perspective of Foreign Investors
https://doi.org/10.1057/s41599-023-01571-8 OPEN
Investment intensity is the level of investment in fixed assets that affects a company’s long-
term growth prospects. In order to make good investment decisions, investors pay more
attention to achieving a high level of investment intensity. This study examines the impact of
two non-GAAP measures of profitability—earnings before interest, tax, depreciation, and
amortization and earnings before interest and tax—on investment intensity in Gulf Coop-
eration Council (GCC) member countries. The study also examines the preference for two
non-GAAP measures of profitability from the perspective of foreign investors. The study
conducts panel data regressions using 205 firm observations covering the period 2010–2019
to examine the relationship between earnings before interest, tax, depreciation and amorti-
zation, earnings before interest and tax, and investment intensity. The study used various
statistical estimators to overcome the heterogeneity and endogeneity problems of panel data
and employed many diagnostic tests to increase robustness. The study finds that earnings
before interest, tax, depreciation and amortization are positively and significantly associated
with investment intensity in all GCC countries, but earnings before interest and tax are
negatively associated with investment intensity in these countries. The results indicate that
foreign investors prefer to use earnings before interest, tax, depreciation, and amortization to
make decisions about investment intensity. The main implication of the study is that capital
market regulators and foreign investors should use earnings before interest, tax, depreciation,
and amortization information as a guideline to improve investment intensity decisions and
achieve a better allocation of resources in capital markets.
I
Introduction
nvestment-intensive firms use a large portion of their version of earnings. Venter et al. (2014) found that non-GAAP
resources to purchase fixed assets such as machines as opposed earnings reported under a mandatory regime have higher value
to investing in labor. The investment-intensive concept gained relevance than GAAP earnings. Entwistle et al. (2010) noted that
importance in early 2000 in the Gulf Cooperation Council (GCC) investors highly weight non-GAAP performance metrics, which
region when governments and businesses started thinking of are more value-relevant than GAAP metrics. McClure and
reducing dependence on the oil and gas industry. Zakolyukina (2021) found that by removing transitory items,
Over the last few years, the GCC-nonfinancial industry has been such as depreciation and amortization, investment efficiency will
growing rapidly as a result of the vision of all six GCC countries that improve non-GAAP performance. Black et al. (2018) noted that
there should be a focus on increasing the economic growth of the the number of firms reporting earnings on a non-GAAP basis,
nonfinancial industry. The performance of the nonfinancial sector is such as EBITDA, dramatically increased over the last decade.
the third largest in terms of growth, and its contribution to GDP was Second, GCC countries are more interested in economic diver-
10.9% as of 2016 (Mishrif, 2018). GCC countries are diversifying sification, as they take serious actions to invest away from oil and
their economies by giving the nonfinancial sector more attention gas in order to develop policies in line with the expectations of
due to its potential role in attracting new investments. The non- foreign investors and investment in other related infrastructure.
financial sector includes heavy manufacturing companies, such as GCC countries give more weight to these investments as a source
steel, cement, etc., other than oil and gas. As the number of of revenue in the budget in their future visions. AL-Matari et al.
investment opportunities is unlimited for the nonfinancial sector (2021) pointed out that GCC countries were trying to have a good
along with the prospect of maximizing cash inflows, GCC countries investment climate by accepting more foreign investment, which
achieve financial stability and a high probability of establishing helps them to provide important platforms for new technology,
diverse companies based on oil and gas output. maintain a healthy balance of payment (BOP) account for the
In the economic literature, investment intensity, and capital gross domestic products (GDP) of the host country, create more
intensity are used interchangeably despite the differences job opportunities to reduce unemployment, and achieve eco-
between them (McGee, 2015). The main concern when working nomic integration. The association between GCC economies and
with both concepts is using the same proxies to measure them. foreign investments is a significant discussion, as these invest-
Investment intensity is important for economic growth and ments are new in these economies. Prior studies (e.g., Siriopoulos
sustainable development in the long term. The investment brings et al., 2021; Dkhili and Dhiab, 2018; Habibi and Karimi, 2017)
benefits to the firm in the future. Therefore, investors invest in have found that foreign investments are an important factor in
investment-intensive firms, predicting attractive future pro- GCC economic growth. GCC countries have a better economic
spects. These firms may also ignore current losses, keeping in environment and are capable of realizing the benefits of foreign
mind future growth prospects. investments because they have a higher degree of integration in
Investment-intensive industries need a high number of finan- global business. Third, capital intensity and investment intensity
cial resources to produce products or services and therefore play receive considerable interest in GCC countries. Al-Mejren (2019)
an important role in improving firm performance. A high level of asserted that GCC countries recognize the importance of
investment intensity may increase the profitability of the firm, investment intensity as an index that represents an appropriate
which will move the firm toward financial efficiency. Investment indicator for judging the effectiveness of policies aiming to
intensity represents an important variable that signals future maintain the balancing of manpower in the labor market.
profitability. Prior studies (e.g., Lee, 2010; Shaheen and Malik, Therefore, the results of this study add new empirical evidence
2012; Kalbuana et al., 2020; Maxim, 2021) find a positive rela- from emerging markets that have not been addressed prior, i.e.,
tionship between investment intensity and firm performance. The whether foreign investors prefer to use the EBITDA/EBIT metric
findings of these studies show that firms invest in fixed assets in making investment intensity decisions. Hence, the researchers
because they play an effective role in sustaining a firm’s success. believe that the findings of the study will add to the literature and
This study aims to examine the association between EBITDA, will help managers, regulators, and investors make better deci-
EBIT, and investment intensity in GCC countries. The study also sions and achieve better allocation of resources in capital markets.
aims to test the preference of foreign investors who use EBITDA or Universally, some studies have previously examined the asso-
EBIT in determining investment intensity. This is an important ciation between profitability and investment intensity. The results
issue because investors prefer to use a modified version of earnings are mixed, resulting in a positive or negative association between
such as non-GAAP rather than a GAAP version of earnings. Hence, capital investments and profitability. Mithas et al. (2012), Yu et al.
the study answers the following questions: are EBITDA and/or (2017), Sudiyatno et al. (2012), Pandya (2017), Pantea et al.
EBIT good indicator(s) for investment intensity in GCC economies? (2014), and Nangih and Onuora (2020) found a positive and
Do foreign investors prefer to use EBITDA and/or EBIT in deciding significant association between investment intensity and profit-
the investment intensity in GCC economies? We build a dynamic ability, indicating that higher investment intensity results in higher
model of investment and non-GAAP parameters where investors profitability. Other studies (e.g., Singh et al., 2016; Aktas et al.,
seek to maximize investment intensity. Our model shows the ability 2015) found a negative association between investment intensity
to use non-GAAP earnings in deciding investment intensity. and profitability, indicating that higher investment intensity
This study is conducted in GCC countries for multiple reasons. results in lower profitability. In discussing the association between
First, the previous literature focuses on EBIT and EBITDA as profitability and investment intensity, most of these studies use
performance metrics but does not use these parameters in GAAP profitability measures such as margin profit (Nangih and
investment-intensive firms such as those in this study. The Onuora, 2020), return on assets (Pandya, 2017), and net profit
majority of these studies (e.g., Ester and Ballkoci, 2017; Chukwu (Mithas et al., 2012). This study uses non-GAAP metrics, which
and Egbuhuzor, 2017; Amoroso et al., 2017; Oeta et al., 2019) are more important from the perspective of investors (Jan et al.,
used other parameters, such as ROA and ROE, which are cal- 2019). This study sheds light on the features of EBITDA and EBIT
culated and influenced by GAAP rules. To avoid the effect of as measures of profitability and evaluates their validity as indica-
GAAP parameters on investment, this study uses non-GAAP tors from a foreign investor perspective.
metrics: EBITDA and EBIT. Investors prefer using a modified In GCC countries, the association between investment intensity
version of earnings, such as non-GAAP, rather than the GAAP and profitability has not been addressed in the past despite its
importance. Thus, the current study aims to fill this gap. All six intensive enterprises as the research object. The study aims to
GCC countries started diversifying their economies by focusing examine the association between investment intensity and prof-
on the performance of the nonfinancial industry as well as the itability in terms of non-GAAP measures which are EBITDA and
finance and banking sector by increasing investments in these EBIT. The uniqueness of the study is to test the preference of
industries. There is a major transition in all six GCC countries profitability metrics such as EBITDA and EBIT used by foreign
that diversified their economies to focus on the nonfinancial investors in deciding the investment intensity.
sector by increasing investments in these industries, which is why Prior studies used different measures of performance and capital
GCC countries are selected as the research subject. Investment investments. Pro proxies such as return on assets, share return,
intensity is one of the most important topics in GCC countries for productivity, Tobin’s Q, earnings, net income, and operating
the following reasons. First, the capital markets of GCC countries income are used to measure performance (Grozdic et al., 2020).
are developing and rapidly growing. Second, in GCC countries, According to Murwaningsari and Rachmawati (2017), capital
the attraction of many foreign investors from all over the world is intensity is measured by the ratio of the total asset turnover of
due to the internationalization scheme that has started and the the capital turnover equal to the total assets to total sales; the higher
free-market policies that have been adopted by governments the ratio is, the higher the capital intensity. Knesl (2019) and
(Siriopoulos et al., 2021). GCC markets are classified as emerging Kalbuana et al. (2020) pointed out that the capital intensity ratio
economies, as they are becoming more engaged with global indicates the level of efficiency of the total assets of the firm in
markets because of their growth. generating a certain volume of sales. Therefore, if the total assets
In GCC countries, the performance of the nonfinancial sector raise sales, the capital intensity will increase because more assets
plays an important role. First, the governments of GCC countries lead to more sales and finally generate a high level of profit. McGee
strongly believe that the nonfinancial sector is a good substitute (2015) used the change in capital share to measure investment
for the oil and gas sector. Second, these governments of GCC intensity. Kotšina and Hazak (2012) used investment intangible
countries want to ensure that the objectives are achieved to sus- fixed assets as a proxy to measure investment intensity. This proxy
tain investments in this sector. Third, the GCC countries is calculated as the difference between tangible fixed assets at the
encourage the private sector to invest in the nonfinancial sector to end of the year and tangible fixed assets at the beginning of the year
boost this sector through investment. Fourth, to make capital plus annual depreciation cost. Grozdic et al. (2020) used the growth
markets effective, the authority of capital markets in the GCC of fixed assets as a proxy to measure investment intensity, and
countries adopted a policy of attracting foreign investors by Fernández-Rodríguez et al. (2019) used the ratio of fixed assets to
giving them an opportunity to invest in this sector. total assets to measure investment intensity. Kalbuana et al. (2020)
This paper is structured into five sections as follows. Section used a fixed asset intensity ratio (total fixed assets/total assets) to
“Introduction” presents the introduction. Section “Literature measure investment intensity, as capital intensity represents how
review and hypothesis development” details the literature review much of a company’s fixed assets are out of its total assets.
on investment intensity and EBITDA and EBIT. Section “Meth- Following prior studies, Nangih and Onuora (2020) used the
ods” presents the methodological and analytical analysis frame- change in tangible assets during the year plus the annual
work of the study. Section “Results” presents the empirical results depreciation cost in their work. Adding annual depreciation cost
of the study, followed by the discussion and conclusion with enabled them to make a comparison between the performances of
included implications and suggestions for further study. companies in the same industry, making it more understandable
to the foreign investor since some differences exist among the
depreciation methods across the world.
Literature review and hypothesis development
Investment intensity. Investment intensity is the level of
investment in fixed assets and influences the growth prospects of Profitability and EBITDA and EBIT. Profitability is the main
the firm in the long run. It adds to capital assets today with the determinant of the growth and expansion of the private sector.
hope of increasing revenue in the future. It is a measure of how Chukwuma et al. (2022) argued that profitability is important for
efficiently the firm is operating and generating revenues. Among the survival and increase in the scale of business to achieve the
firms in similar industries, with similar processes and similar final goal of growth. Profitability is measured by many proxies,
profits, those with lower intensity are stronger, as they use fewer such as return on assets (Ester and Ballkoci, 2017), return on
assets to generate more revenue. Investment-intensive firms incur equity (Chukwu and Egbuhuzor, 2017), operating income
huge fixed costs and depreciation on equipment and do not (Amoroso et al., 2017), and earnings (Oeta et al., 2019). To the
appear to be attractive. Adiloglu and Vuran (2017) pointed out best of the authors’ knowledge, only one prior study used a dif-
that firms with high investment intensity need additional fixed ferent proxy to measure profitability, that is, earnings before tax,
assets due to high depreciation rates and high-interest payments interest, depreciation, and amortization (EBITDA).
on debt, often leaving them with negative earnings. Therefore, The present study uses two proxies to measure profitability,
they have to achieve a high level of profit to cover these negative namely, EBITDA and EBIT and uses two alternative measures of
earnings. Investment-intensive firms are highly susceptible to the profitability or earnings, such as non-GAAP measures that have
negative impacts of an economic slowdown as a decline in sales been demonstrated in prior studies. Aubert (2010) found that pro
leads to difficulty in incurring fixed costs and depreciation on forma numbers (non-GAAP) are much more informative than
equipment, thus depleting profits. When the economy is in a GAAP earnings. Investors prefer to use a modified version of
downturn, investment-intensive firms experience losses (Rustam earnings such as non-GAAP rather than the GAAP version of
et al., 2019). Such firms seek ways to generate higher revenue. earnings. Venter et al. (2014) found that non-GAAP earnings
Investment-intensive firms are those where there is a robust reported under a mandatory regime have higher value relevance
investment in fixed assets. The nature of these firms is different than GAAP earnings. The focus of EBITDA and EBIT is on the
from others where investment in fixed assets is low. The return- operating profits of the company. These performance measures
on-investment decreases as investment intensity increases. gained popularity in the 1980s when levered buyouts were the
Therefore, firms need to use synergies strategically, and appro- trend. It was used as an alternative performance measure to
priate performance standards should be applied. Taking these conventional methods, such as net income, operating income,
complexities into consideration, the study has taken investment- operating cash flow, and free cash flow (Finnerty and Emery,
2004). EBITDA is used as a metric to compare companies with interest and taxes to state the operating profit, which is a good
different capital structures in the same industry; it is the third indicator to show managers and investors how a firm is per-
most commonly used metric for evaluating the earning capacity forming (Sevella and Mayuri, 2018). Rodrigues et al. (2017)
of companies in the US (Wahlen et al., 2015) and is considered to pointed out that EBIT focuses on the ability of the firm to generate
be a precise and nonbiased metric of performance. For example, sufficient earnings and cash flow from ongoing operations,
EBITDA is a good indicator to measure profitability for some excluding tax and interest, to be profitable, pay off debt, and fund
reasons. First, EBITDA is recommended as a proxy for cash flow ongoing operations.
and liquidity, which is a very important issue from a foreign Prior studies used EBIT as a performance indicator to predict
investor perspective (Iotti and Bonazzi, 2012; Mukhambetov the value of return on assets in relation to the growth in revenues
et al., 2020). Second, the studies in the global scenario used and cost control (Myskova and Hajek, 2017). Others have used
EBITDA as a preferable indicator because it removes the effects of EBIT to determine the effect of capital structure and financial
tax, interest, depreciation, and amortization, which vary from one performance (Ahmed and Bhuyan, 2020).
country to another. Adiloğlu and Vuran (2017) pointed out that The main result of the abovementioned studies finds a positive
EBITDA represents the real profit of the firm because it removes relationship between EBIT and the variables used in these studies.
the effects of financing decisions, accounting decisions, tax For example, Strouhal et al. (2018) noted that EBIT is more
environments, and depreciation expenses, which represent an informative when it is used as a nominator in calculating return
exorbitant amount of money, especially for industrial firms. on assets, as it can have a relatively significant impact on business
Third, Bouwens et al. (2019) asserted that when analyzing the activities. EBIT also has a high comparison power in the case of
performance of industrial firms, EBITDA is the best indicator firms with a higher level of debt in the capital structure because
because it excludes financing and investing effects, which allows EBIT is more sensitive to different levels of debt within the capital
investors to focus on operating profit as a measure of structure. Concerning the relationship between leverage and
performance. Fourth, Christopher and Judson (2012) elucidated EBIT, Ahmed and Bhuyan (2020) found that leverage impacts
that firms with increasing working capital and longer operating firm performance at a statistically significant level when this
cycles are likely to focus on EBITDA. Rozenbaum (2019) performance is measured by EBIT. Accordingly, the second
observed that traditionally high-leveraged and capital-intensive hypothesis is
companies use EBITDA as their performance tool. It is used to
reflect the ability of a company to service debt. According to Jan H2: A positive association exists between EBIT and
et al. (2019), firms with higher leverage and higher interest investment intensity.
expenses use EBITDA more frequently as a performance measure
than other measures. These reasons motivated the researchers to
Methods
take EBITDA and EBIT as the performance measures in
Sample selection. The sample of this study consists of 205
this study.
nonfinancial firms from the stock markets of KSA, Oman, Bah-
Using two profitability parameters means that the study tries to
rain, UAE, Kuwait, and Qatar from 2010 to 2019, and the data are
cover more than one angle. Providing more than one parameter
from S&P Capital IQ. Like other related studies (e.g. Chukwuma
will give more information and value to the investor when
et al., 2022; Jamil, 2022; Bibi and Sumaira, 2022). The study uses
entering new markets. However, by using non-GAAP metrics
secondary data, which involves the collection of quantitative data.
(such as EBITDA), the effect of amortization and depreciation
The total number of firms in this study is 683. This study excludes
will be removed because amortization and depreciation as
326 banks and financial institutions due to the different rules and
accounting issues are treated differently by each business and
regulations implemented in both organizations. Accordingly, the
country. Here, investors will not find any difficulties in under-
final sample of the study includes 2050 firm-year observations.
standing the content of financial information.
This study does not include data from 2008–2009 due to the
impact of the financial crisis and its consequences. Table 1 shows
EBITDA and investment intensity. Some prior studies (e.g., the details of the sample.
Chandrakumaramangalam and Govindasamy, 2010; Xin and Xu,
2012; Grazzi et al., 2016; Taipi and Ballkoci, 2017; Lian et al.,
Variables. This study has three groups of variables. The first is
2017; Korent and Orsag, 2018; Singh and Bagga, 2019) found a
the independent variable, which includes two variables, namely,
positive association between investments and profitability. In
EBITDA, which is defined as earnings before tax, interest,
contrast, other prior studies (e.g., Shima, 2010; Alipour et al.,
depreciation, and amortization. The second independent variable
2015; Zaigham et al., 2019; Bialowolski and Wezia, 2014;
is EBIT, defined as earnings before tax and interest. Prior studies
Reschiwat et al., 2020) found a negative association among dif-
(e.g., Entwistle et al., 2010; Iotti and Bonazzi, 2012; Rodrigues
ferent types of investments and profitability. These contrasting
et al., 2017; Black et al., 2018; Brown, 2020; Arena et al., 2021)
findings motivated us to study the relationship between a firm’s
used EBITDA and EBIT as measures of non-GAAP metrics
investment intensity and EBITDA with special reference to
because firms are able to adjust the profit in the income state-
companies in GCC countries. The data for the study are taken for
ments into these metrics. Sherman and Young (2018) pointed out
a period of 10 years from 2010 to 2019 for nonfinancial listed
that many firms prefer to disclose “the common unofficial metric
firms in the GCC. From the discussion of prior literature, no such
such as EBITDA” to enhance the comparability of financial
study was apparently conducted in the GCC countries. Therefore,
information. Arena et al. (2021) asserted that the reporting of
the first hypothesis is
both EBITDA and EBIT improves the relevance of financial
H1: No association exists between EBITDA and invest- information by increasing the predictive ability of earnings.
ment intensity. Following prior studies, this study uses EBITDA and EBIT to
measure profitability, as they have more value relevance from the
perspective of investors. The values of EBITDA and EBIT were
EBIT and investment intensity. Another indicator that is calculated and stated in the IQ capital database. The second group
commonly used as a proxy of profitability is earnings before includes the dependent variable, which is investment intensity
interest and tax (EBIT). This measure removes the effect of (INV). INV is measured by the total assets at the end of the year
Hausman test is used (Bibi and Sumaira, 2022 as Fixed Effect (FE)
Table 7 The results of Breusch–Pagan/Cook–Weisberg test and Random Effect (RE) were used and the result of the Hausman
for heteroskedasticity. test shows that the RE test is adopted as the significant probability
is higher than 0.05 (Prob>chi2 = 0.9230) and (chi2(6) =
Breusch–Pagan/Cook–Weisberg test for heteroskedasticity (b−B)’[(V_b−V_B)^(−1)](b−B)) is 1.96.
Ho: Constant variance Table 8 shows the results of the GLS random effects regression
Variables: fitted values of Inv between EBITDA and EBIT and INV. According to the results in
chi2(1) 177.37 the table, the regression model is significant at 0.01, as EBITDA
Prob > chi2 0.0000 has a positive and significant effect on investment intensity
(84.318) (p-value < 0.01). EBIT is negatively and significantly
related to INV at 0.05 (−22.774) (p-value < 0.05). R2 supports the
results of this model as it is equal to (0.3175). These results
Pagan / Cook-Weisberg test for heteroskedasticity and it found indicate that the increase in EBITDA leads to an increase in
that heteroskedasticity is present in the data of this research investment intensity and the explanatory power of EBITDA (R2)
(chi2(1) = 177.37 and Prob > chi2 = 0.0000). Therefore, it seems explains 31.75% of the investment intensity. Conversely, the
that the OLS estimator is unreliable due to bias. Table 7 shows the results indicate that EBIT is not a good indicator to decide on
results of the Breusch–Pagan/Cook–Weisberg test for INV and, moreover, it may give a negative indication of the
heteroskedasticity. impact on INV.
On the other hand, the study examines the data against the The analysis of the relationship between the control variables
autocorrelation problem as the study uses Durbin–Watson (DW) (S, LEV, AG, and GRO) and INV shows different results. S and
test. The value of the DW statistic is 1.415342 which indicates GRO have a positive and significant effect on INV at 0.01,
that the data has an autocorrelation problem. indicating that the larger the firm, the higher the INV meets the
production requirements. GRO has a positive and significant
FGLS regression, DPD analysis, GLS regression, and DOLS effect on INV at 0.01. The result of GRO indicates that
regression. Table 8 shows the results of FGLS, DPD, GLS, and investments are influenced by the future direction of profitability
DOLS, respectively. of the firms. LEV and AG have insignificant effects on INV,
indicating that these variables have no effect on INV.
Feasible general least squares (FGLS) regression. As the study
found the problems of heteroskedasticity and autocorrelation,
Dynamic panel data (DPD) model. The Hausman test indicated
and to increase robustness and solve the problems of diagnostic
that the GLS random effect model should be used to examine
tests, the study used feasible general least squares (FGLS)
the effect of EBITDA and EBIT on INV. In order to improve the
regression. FGLS measures the coefficients and covariance matrix
results of the GLS random effect model and to remove the
for a multiple linear regression model in the presence of non-
unobserved heterogeneity in this model, the DPD model is used.
spherical innovations and an unknown covariance matrix Liu
The results of DPD as shown in Table 8 indicate that the coef-
(2021). FGLS is more efficient than ordinary least squares (OLS)
ficient of EBITDA is large (177.934) which is significant at 0.01,
in the presence of heteroskedasticity and autocorrelation. The
but the coefficient of EBIT (−46.202) is negative and significant
results of FGLS as shown in Table 8 show that EBITDA and LEV
at 0.01, which confirms that these two independent variables have
have a positive and significant effect on INV with 0.01 and 0.05,
an effect on INV.
respectively, while S and AG have a negative and significant effect
on INV with 0.01. However, EBIT and GRO have an insignificant
effects on INV at 0.05. The results of FGLS show that there is no Dynamic ordinary least square (DOLS) model. After correcting
heteroskedasticity and no autocorrelation in the model. for heteroskedasticity and serial correlation problems, DOLS was
used to increase robustness as the panel data suffered from
Hausman test, random effect (RE) vs. fixed effect (FE). In order endogeneity problems (Bassey et al., 2022). The DOLS results
to improve the regression model and as the results of OLS are confirm that EBITDA has a positive and significant effect on INV
unreliable, this study uses GLS regression which is used to deal at 0.01, but EBIT does not have such an effect as the coefficient is
with situations where the OLS estimator is not efficient due to the insignificant at 0.05. Also, LEV has a positive and significant
problem of homoskedasticity and lack of serial correlation. To effect on INV, while AG has a negative and significant effect at
overcome the problem of heterogeneity in the panel data, the 0.01. Finally, S and GRO have an insignificant effect on INV.
5 The results of this study filled the research gap in the area of
investment intensity, as the study provided empirical evidence
4
from one business environment that has not been addressed
3 before. This evidence enhances the idea of the importance of non-
2 GAAP measures in deciding about investment intensity.
1
The study can guide investors, policymakers, and managers.
First, policymakers and regulators should devise a measurement
0
of EBITDA and EBIT that can be used to regulate and control it,
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1171
1236
1301
1366
1431
1496
1561
1626
1691
131
196
261
391
456
521
586
651
716
781
846
911
976
-1 as it will raise market confidence and enhance the relationship
-2 between accounting information and market equity. The dis-
closure of EBITDA and EBIT metrics is crucial for the success of
-3
future reforms to improve market efficiency, investor protec-
EBITDA EBIT tion, and investments in emerging economies, such as the GCC.
The results of this study suggest that managers should develop
Fig. 1 The both profitability measures, EBITDA and EBIT, attempt to and maintain high-quality disclosure of investment and profit-
represent the cash profit generated by the firm’s operation. This ability that provides a general framework for using non-GAAP
indicates that the fluctuations of EBITDA and EBIT reflect the fluctuations in (IFRS) measures along with GAAP (IFRS) measures. Stake-
the firm’s operation. holders are interested in more relevant and reliable information.
Therefore, regulators of the capital market should use profit-
the sample period, although it fluctuates in some years, which ability information as guidelines to improve investment inten-
indicates that the goals of these investments are achieved. These sity decisions to enhance the allocation of resources in capital
results encouraged owners to increase investments in infra- markets. This study has some limitations. First, the study uses
structure in GCC countries. EBIT has the same direction as firm financial reports to measure the main variable of the study.
EBITDA despite being less than EBITDA and having more Second, it only focuses on one measure of investment intensity,
fluctuations. Figure 1 shows the directions of both EBITDA and which is the change in tangible assets. Other measures of
EBIT during the period of the study in GCC countries. investment intensity may yield different results and provide
Conversely, EBIT does not seem to be a good indicator in GCC additional insights into investment intensity. Third, it only
countries. EBIT and investment intensity are negatively related investigates the potential association between Investment
and do not give a positive signal on investment intensity. One intensity and profitability and does not establish any causal
reason behind this finding is the inclusion of the depreciation of relationship between them, as investment intensity can affect
fixed assets in calculating EBIT, as it can lead to varying results profitability and vice versa. However, this study does not
when compared with firms in different industries and different address this relationship. Finally, the study might not be gen-
countries. The amount of depreciation and amortization in the eralized to other regions, but it adds some value, as its findings
listed firms is high. Therefore, EBITDA is more than EBIT in all suggest several interesting associations.
these firms. This finding shows that EBITDA represents operating
cash flow better than EBIT because EBITDA removes the effect of
depreciation and amortization. Data availability
The results illustrate that foreign investors prefer to use The datasets generated during and/or analyzed during the current
EBITDA in deciding investment intensity. This preference is study are available from the corresponding author on reasonable
explained by the fact that foreign investors assess the ability of the request.
firm to generate cash, and EBITDA represents a good approx-
imation of cash. This finding is in line with the studies of Cassis Received: 29 July 2022; Accepted: 20 February 2023;
(2002). The results show that this relationship is indeed increased
in the leveraged firms in comparison with less leveraged firms,
and leverage has a positive effect on INV in these countries,
providing a balance between risk and return.
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