The relationship between investment intensity and profitability measures from the perspective of foreign investors

Abstract

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 Cooperation 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 amortization, 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.

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