Are CEOs Rewarded for Luck? Evidence from Corporate Tax Windfalls
Journal of Finance, forthcoming
80 Pages Posted: 18 Aug 2022 Last revised: 3 Aug 2023
Date Written: August 24, 2023
Abstract
Focusing on the one-off tax gains and losses (i.e., windfalls) associated with the 2017 Tax Cuts and Jobs Act, we re-examine whether CEOs are rewarded for luck. We find that weakly-monitored CEOs are compensated for the windfall tax gains but not penalized for the corresponding tax losses. No such pattern is observed for CEOs facing greater pay scrutiny. The pay for windfalls cannot be explained as rewards for CEOs’ efforts, talents, political activities, or as firms sharing their tax gains with all executives. The results are more consistent with rent extraction by CEOs facing weak pay scrutiny.
Keywords: Executive compensation, pay for luck, corporate taxes, Tax Cuts and Jobs Act of 2017
JEL Classification: G30, H25, J33
Suggested Citation: Suggested Citation