The Value and Incentive Relevance of Nonrecurring Items: Under Conservative Accounting

I find that the value relevant components of special items and discontinued operations at the industry-level provide useful information to assess the performance of intangibles. Special items send noisy signals about future growth opportunities for firms within an industry, while discontinued operation send clear signals about the values of intangibles in the sector. I also find a significant positive (negative) link between CEO market-based compensation and the signals sent by discontinued operations (special items). My results suggest that compensation committees in firms across an industry consider the information about intangibles relayed by discontinued operations and special items, and selectively alter the level of incentives to encourage managers to send informative signals when reporting these items.