CEO Tax Lock-In and Share Pledging

ABSTRACT

We study how CEOs’ personal tax incentives shape their share pledging decisions and firms’ restrictions on the practice. Pledging shares entails using company stock as collateral for personal loans, enabling executives to obtain liquidity without making a taxable sale of appreciated shares. Using pledging data from 2006 to 2024, we find a robust positive relation between CEOs’ unrealized capital gains tax liabilities, or tax burdens, and share pledging. This relation is weaker when interest rates are high, consistent with CEOs’ trading off tax benefits against borrowing costs. After Institutional Shareholder Services discouraged share pledging in 2012, firms with high-tax-burden CEOs were slower to adopt antipledging policies and, when they did adopt, chose less restrictive policies. Firms that adopted strong antipledging policies subsequently increased CEO cash pay and stock awards. Our evidence suggests that share pledging helps executives manage personal tax lock-in and that firms consider this benefit when restricting pledging.

Data Availability: Data are available from the public and subscription sources identified in the text, subject to applicable data-use restrictions.

JEL Classifications: G30; H24; J33; M52.