Share Pledging

Abstract

Managerial share pledging (using shares as collateral for personal loans) is controversial. Institutional Shareholder Services (ISS), highly publicized anecdotes, and international research suggest that share pledging increases the risk of stock price crashes. Nevertheless, U.S. boards continue to allow the practice, suggesting that share pledging benefits shareholders or some boards are beholden to controlling managers who enjoy the private benefits of share pledging. Using a hand-collected dataset of share pledging by executives and directors of S&P 1500 firms from 2007-2020, I document three benefits-greater incentive alignment, reduced executive pay and lower voluntary executive turnover-while finding little evidence of increased crash risk. Interestingly, these benefits do not exist for firms with high managerial control. However ISS's 2012 policy denouncing share pledging did little to reduce share pledging among these firms. Instead the ISS policy increased negative shareholder votes at firms with both high and low managerial control with any share pledging, coinciding with a reduction in share pledging at firms with low managerial control, despite these firms enjoying benefits from share pledging. Overall my findings suggest that, for well-governed firms, managerial share pledging facilitates incentive alignment and lowers executive turnover and pay while not increasing stock price crash risk, calling into question efforts by ISS and others to curb the practice for all firms.