Nonrecurring Items and CEO Market-Based Compensation

Wednesday, December 18, 2013 ( 12:00 pm to 1:00 pm )

Location: Babbio 430

Yoshie Saito Lord, Assistant Professor, Old Dominion University

Because nonrecurring items are not persistent and have a fleeting effect on firm value, they are often characterized as transitory or irrelevant to firm value. However, the informational value of nonrecurring are not well understood. I find that industry level of measures of in formativeness of special items and discontinued operations can be used to revise market assessment of firm value and these signals are also useful for compensation committees to design contracts that encourage managerial effort to reduce uncertainty. Special items send noisy signals about future growth opportunities for firms within an industry, while discontinued operations provide clear signals about firm value 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 contained in these nonrecurring items, and selectively alter the level of incentives to encourage managerial efforts, and to try to reduce costly uncertainty.

Yoshie Saito Lord earned her Ph. D. from Temple University, her M.S. is from the University of Georgia, M.B.A. Georgia College and her B.A. is from Nihon University, Tokyo. Japan. Lord is an Assistant Professor at Old Dominion University in Virginia. Her courses include Introduction to Cost/ Management Accounting and Cost/ Management Accounting for MACC.

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