Download This PaperCEO Taxes and Share Pledging
51 Pages Posted: 31 Jan 2025
Date Written: January 03, 2025
Abstract
We investigate the link between CEOs' unrealized capital gains tax liabilities ("tax burdens") and share pledging; a practice in which executives use shares in their firm as collateral for personal loans. We argue that a prime benefit of share pledging is the ability to obtain personal liquidity without selling appreciated stock, thereby enabling CEOs to avoid triggering large tax liabilities. Employing a hand-collected sample of executives' share pledging, we provide the first systematic evidence that CEO taxes are a primary driver of the decision to pledge shares. After Institutional Shareholder Services (ISS) discouraged the practice in 2012, firms with high-tax burden CEOs were less likely to impose anti-pledging restrictions. Moreover, those firms that restricted share pledging increased liquid pay for affected CEOs. Overall, our findings indicate that taxes are a first-order driver of share pledging, and that firms and CEOs use share pledging to contract around CEOs' personal tax liabilities.
Keywords: share pledging, capital gains taxes, CEO, compensation
JEL Classification: G30, H24, H26, J33, M52
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