Anti-Pledging Policy, CEO Compensation, and Investment

56 Pages Posted: 9 Sep 2019

See all articles by Jihun Bae

Jihun Bae

Erasmus University Rotterdam

Ruishen Zhang

Shanghai University of Finance and Economics

Date Written: August 20, 2018

Abstract

We study the implications of a recent governance practice promoted by proxy advisors, namely an anti-pledging policy, which limits managers' ability to unwind their equity-based compensation. Using a sample of S&P 1500 firms, we find that CEOs' pay-for-performance sensitivity (i.e., delta) and risk-taking incentives (i.e., vega) as well as firms' investment growth and investment-Q sensitivity decrease after the adoption of an anti-pledging policy. Meanwhile, adoption mitigates opposition from proxy advisors. Taken together, our findings suggest that limiting compensation flexibility to cater to proxy advisors may produce unfavorable outcomes for firms, which calls into question a one-size-fits-all approach to governance policies.

Keywords: Governance policy, Share pledging, Compensation, Investment, Proxy advisors

JEL Classification: G31, G34, M12, M52, D72

Suggested Citation

Bae, Jihun and Zhang, Ruishen, Anti-Pledging Policy, CEO Compensation, and Investment (August 20, 2018). Available at SSRN: https://ssrn.com/abstract=3445348 or http://dx.doi.org/10.2139/ssrn.3445348

Jihun Bae

Erasmus University Rotterdam ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Ruishen Zhang (Contact Author)

Shanghai University of Finance and Economics ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

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