What Roles Can Nonrecurring Items Play?
61 Pages Posted: 3 Jan 2008
Date Written: January 3, 2008
Prior research on accounting conservatism suggests two distinct roles that nonrecurring items can play for firms with a high level of intangibles. One is for market participants to assess the value of operating activities and the other is to provide incentives for managers. For the valuation role, I find convincing evidence that special items and discontinued operations contain useful information about unrecorded intangibles. Discontinued operations signal a downward adjustment of the value of intangibles and special items signal an upward adjustment. In contrast, for the incentive role, I find only weak evidence of a relationship between the use of market-based compensation and the ability of nonrecurring items to explain goodwill. My findings have important implications for standard setters and accounting researchers because they indicate that even when core earnings cannot convey adequate information about important intangible projects, investors can assess the value of intangibles and related managerial decisions from reports of special items and discontinued operations. They also indicate that reliability is an important attribute for incentive relevance, and suggest the presence of a tradeoff between value relevance and reliability of special items and discounted operations in a compensation contracting.
JEL Classification: G12, M41, M44, J33
Suggested Citation: Suggested Citation