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CEO compensation and real estate prices: pay for luck or pay for action?

Author

Listed:
  • Ana Albuquerque

    (Boston University Questrom School of Business)

  • Benjamin Bennett

    (Tulane University Freeman School of Business)

  • Cláudia Custódio

    (Imperial College Business School)

  • Dragana Cvijanović

    (Cornell SC Johnson College of Business)

Abstract

This paper uses variation in real estate prices to study Chief Executive Officer (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.

Suggested Citation

  • Ana Albuquerque & Benjamin Bennett & Cláudia Custódio & Dragana Cvijanović, 2023. "CEO compensation and real estate prices: pay for luck or pay for action?," Review of Accounting Studies, Springer, vol. 28(4), pages 2401-2447, December.
    • Handle: RePEc:spr:reaccs:v:28:y:2023:i:4:d:10.1007_s11142-022-09700-5
    DOI: 10.1007/s11142-022-09700-5
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    More about this item

    Keywords

    Real estate; Pay for luck; Pay for action; CEO pay;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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