Nonrecurring Accounting Transactions and Stock Option Grants

Abstract

Abstract: We examine the effect of nonrecurring accounting transactions on stock option grants for a sample of US companies. After controlling for both the economic and corporate governance‐related determinants of option grants, we find that the aggregate value of stock option grants is more positively related to nonrecurring gains than to nonrecurring losses. We also examine whether the asymmetric treatment of nonrecurring gains and losses arises because (1) information contained in the nonrecurring transactions is related to firms’ long‐term prospects, (2) weak corporate governance fails to curb more favorable executive pay arrangements, (3) executives possess superior bargaining power in the labor marketplace, and (4) firms have significant growth opportunities. While we find no support for the first explanation and some support for the third, we find more consistent support for the growth explanation and two factors related to the corporate governance explanation: director‐executive duality and the frequency of board meetings.