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

See all articles by Martina Andreani

Martina Andreani

INSEAD - Accounting and Control Area

Atif Ellahie

University of Utah - David Eccles School of Business

Lakshmanan Shivakumar

London Business School

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

Andreani, Martina and Ellahie, Atif and Shivakumar, Lakshmanan, Are CEOs Rewarded for Luck? Evidence from Corporate Tax Windfalls (August 24, 2023). Journal of Finance, forthcoming, Available at SSRN: https://ssrn.com/abstract=4187942 or http://dx.doi.org/10.2139/ssrn.4187942

Martina Andreani

INSEAD - Accounting and Control Area ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305
France

Atif Ellahie (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Lakshmanan Shivakumar

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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