CEO Compensation and Real Estate Prices: Pay for Luck or Pay for Action?
55 Pages Posted: 8 Aug 2018 Last revised: 9 Mar 2021
Date Written: March 8, 2021
This paper uses variation in real estate prices to study CEO pay for luck. We distinguish between pay for luck and pay for responding to luck (action) by exploiting US GAAP accounting rules, which state that real estate used in the firm’s operations is not marked-to-market. Thus, in the context of real estate luck, 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 responses to luck by examining specific actions taken by the CEO in response to changes in real estate asset values: real estate sales, Sale and Lease Back (SLB) transactions, and debt issues. Our results indicate that accounting rules and practices (in this case, using historical costs and not marking-to-market real estate assets) have real implications for CEO pay.
Keywords: pay for luck; real estate prices; executive compensation; accounting returns
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