Are CEOs Rewarded for Luck? Evidence from Corporate Tax Windfalls

The authors take advantage of a 2017 change in tax rules in the U.S. to re-examine whether CEOs are rewarded for luck. The authors examine the effect of one-off tax gains and losses associated with deferred tax assets and liabilities on CEO compensation around the Tax Cuts and Jobs Act (TCJA) of 2017. Relative to other years, the authors find that less visible firms compensated their CEOs more for the one-time tax windfall gains during the TCJA-transition period. Further, the authors find evidence in support of pay asymmetry; CEOs of less visible firms were compensated more for tax windfall gains but were not compensated less for tax windfall losses. The CEO pay associated with the tax windfalls cannot be explained as firms sharing these tax gains with all employees. These results are consistent with rent-extraction by CEOs of less visible firms.