CEO Compensation and Real Estate Prices: Pay for Luck or Pay for Action?

Review of Accounting Studies, Forthcoming

51 Pages Posted: 8 Aug 2018 Last revised: 10 Jan 2022

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University - Questrom School of Business

Benjamin Bennett

Tulane University - A.B. Freeman School of Business

Claudia Custodio

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Dragana Cvijanovic

Cornell SC Johnson College of Business

Date Written: January 4, 2022

Abstract

This paper uses variation in real estate prices to study CEO pay for luck. We distinguish between pay for luck and pay for responding to luck (action) by exploiting US GAAP accounting rules, which mandate that real estate used in the firm's operations is not marked-to-market. This setting allows us to empirically disentangle pay for luck from pay for action, as a change in the value of real estate is only accounted for when the CEO responds to changes in property value. We show that CEO compensation is associated with the following two managerial responses to changes in real estate values: (i) real estate sales and (ii) debt issuance. Overall, we show that CEOs are rewarded for taking value enhancing actions in response to luck.

Keywords: pay for luck; real estate prices; executive compensation; accounting returns

JEL Classification: D81, G30, J33

Suggested Citation

Albuquerque, Ana M. and Bennett, Benjamin and Custodio, Claudia and Cvijanovic, Dragana, CEO Compensation and Real Estate Prices: Pay for Luck or Pay for Action? (January 4, 2022). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3212867 or http://dx.doi.org/10.2139/ssrn.3212867

Ana M. Albuquerque

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-358-4185 (Phone)
617-353-6667 (Fax)

HOME PAGE: http://sites.google.com/bu.edu/ana-albuquerque/home

Benjamin Bennett

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

HOME PAGE: https://sites.google.com/site/benjaminbennettfinance/home

Claudia Custodio (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Dragana Cvijanovic

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

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