Journal of Finance
Lakshmanan Shivakumar, Atif Ellahie, Martina Andreani
School of Accounting
Abstract
We re-examine whether CEOs are rewarded for luck by focusing on the unexpected, one-off tax gains and losses (i.e., windfalls) associated with the 2017 Tax Cuts and Jobs Act. 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.
