CEO Compensation and Real Estate Prices: Pay for Luck or Pay for Action?

55 Pages Posted: 8 Aug 2018 Last revised: 9 Mar 2021

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University - Questrom School of Business

Benjamin Bennett

Tulane University - A.B. Freeman School of Business

Claudia Custodio

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Dragana Cvijanovic

Cornell SC Johnson College of Business; Warwick Business School, University of Warwick

Date Written: March 8, 2021

Abstract

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

Suggested Citation

Albuquerque, Ana M. and Bennett, Benjamin and Custodio, Claudia and Cvijanovic, Dragana, CEO Compensation and Real Estate Prices: Pay for Luck or Pay for Action? (March 8, 2021). Available at SSRN: https://ssrn.com/abstract=3212867 or http://dx.doi.org/10.2139/ssrn.3212867

Ana M. Albuquerque

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-358-4185 (Phone)
617-353-6667 (Fax)

Benjamin Bennett

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

HOME PAGE: https://sites.google.com/site/benjaminbennettfinance/home

Claudia Custodio (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Dragana Cvijanovic

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Warwick Business School, University of Warwick ( email )

Coventry CV4 7AL
United Kingdom

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