We provide evidence that local political corruption significantly and positively affects CEO compensation, and we demonstrate that this positive association is contingent on asset shielding mechanisms and corporate governance quality. Specifically, corruption appears to inflate CEO compensation to a greater extent in firms with higher cash holdings, paying out dividends, or absence of operating losses. Additionally, the positive correlation between corruption and CEO compensation is more pronounced in firms with less efficient monitoring. Further analysis reveals that, although higher compensation can enhance firm performance, this positive effect is significantly reduced in firms headquartered in more corrupt areas. These findings strongly support the rent extraction explanation of CEO compensation. Our results are robust across different measures of political corruption, variations in model specifications, and assessments of causality.
