Why Do U.S. CEOs Pledge Their Own Company's Stock?

Abstract

Between 2007 and 2016, 7.6% of publicly listed U.S. firms disclosed that their CEOs had pledged company stock as collateral for a loan. On average, CEOs pledge 38% of their shares. The mean loan value is an economically sizeable $65 million. CEOs use the funds to either double down (6.0%), hedge their ownership (3.5%), or to obtain liquidity while maintaining ownership (90.5%). My event study results reveal that stock market participants view pledging as value-enhancing, but perceive significant pledging as value-destroying. Similarly, I find no evidence of its negative shareholder value consequences, except for CEOs who engage in significant pledging.

Keywords: CEO ownership, CEO incentives, pledging shares, margin loan

JEL Classification: G30, G32, G34