Abstract
Nonrecurring items are often characterized as transitory and are assumed to be irrelevant for firm valuation. However, I find that industry-level measures of the informativeness of special items and discontinued operations help to revise market assessments of firm value, and these signals are also systematically associated with CEO market-based compensation. The results suggest that discontinued operations provide clear signals about the business environment in the sector and reduce goodwill, while special items send noisy signals about future performance and increase goodwill. 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 contained in these nonrecurring items, and selectively alter the level of incentives pay to encourage managerial efforts.
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