A growing number of researchers argue that time‐series patterns in returns are due to investor irrationality and thus can be translated into abnormal profits. Continuation of short‐term returns or momentum is one such pattern that has defied any rational explanation and is at odds with market efficiency. This paper shows that profits to momentum strategies can be explained by a set of lagged macroeconomic variables and payoffs to momentum strategies disappear once stock returns are adjusted for their predictability based on these macroeconomic variables. Our results provide a possible role for time‐varying expected returns as an explanation for momentum payoffs.

Focusing on the one‐off tax gains and losses (i.e., windfalls) associated with the 2017 Tax Cuts and Jobs Act, we reexamine whether CEOs are rewarded for luck. We find that weakly monitored CEOs are compensated for the windfall tax gains but not penalized for the corresponding tax losses. No such pattern is observed for CEOs facing greater pay scrutiny. The pay for windfalls cannot be explained as rewards for CEOs’ efforts, talents, political activities, or as firms sharing their tax gains with all executives. The results are more consistent with rent extraction by CEOs facing weak pay scrutiny.