Anti-Pledging Policy, CEO Compensation, and Investment

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