CEOs Facing Large Capital Gains Taxes Pledge More Shares as Loan Collateral

When a chief executive holds company stock that has climbed in value, selling it triggers a large capital gains tax bill. Pledging those shares as collateral for a personal loan raises cash without a sale, and without the tax. A study by Jon Underwood, Assistant Professor of Accounting at the McCoy College of Business at Texas State University, and Benjamin P. Yost of Boston College finds that this tax motive is a major driver of CEO share pledging. The paper is forthcoming in The Accounting Review.

The study

The authors assembled data on CEO share pledging from 2006 through 2024. For each CEO, they estimated the unrealized capital gains tax that would come due if the executive sold their holdings. The researchers call this the CEO’s tax burden. Economists call the broader effect tax lock-in: the tendency to hold an appreciated asset longer than one otherwise would, simply to avoid the tax on selling.

The study then relates each CEO’s tax burden to whether, and how much, the CEO pledged shares. It also examines how firms responded after 2012, when the proxy advisor Institutional Shareholder Services (ISS) began discouraging the practice. Pledging worries some investors because a lender can force a sale of the collateral if the stock falls, which can deepen a decline.

What the researchers found

CEOs with larger unrealized tax liabilities pledge more shares. The relation is robust across the sample period. It is weaker when interest rates are high, which fits the idea that executives weigh the tax saved against the cost of borrowing. When loans are cheap, pledging is an attractive substitute for selling. When loans are expensive, less so.

Firms appear to understand this. After ISS came out against pledging, companies led by high-tax-burden CEOs were slower to adopt antipledging policies. When they did adopt one, they chose weaker versions. Firms that adopted strict antipledging rules later raised CEO cash pay and stock awards, consistent with compensating executives for a lost source of liquidity.

Taken together, the evidence suggests share pledging is partly a tax-planning tool. It helps executives manage lock-in, and boards take that benefit into account when deciding how hard to restrict it.

What it means for boards and investors

For compensation committees, the results reframe the pledging debate. A ban on pledging is not free. If the CEO has large embedded gains, a ban takes away a low-cost route to liquidity, and the company may end up paying for it through higher cash compensation or bigger equity grants. Boards should weigh that cost against the risk that pledged shares pose to other shareholders.

For investors and proxy advisors, the findings help explain why some firms resisted the push against pledging. Resistance may reflect a real economic tradeoff rather than weak governance alone. It also suggests where to look: firms whose CEOs hold large appreciated stakes are the ones most likely to keep permissive policies.

For policymakers, the study links two topics that are usually kept separate: executive compensation and personal capital gains taxation. Changes to the tax treatment of appreciated stock, or to borrowing against it, would likely change pledging behavior as well.

This summary is based on the paper’s abstract. The full article reports the data, methods, and detailed results.

What it means for managers

• Share pledging is partly a tax strategy. CEOs with larger unrealized capital gains tax liabilities pledge more stock, and they pledge less when borrowing is expensive.
• Banning pledging has a cost. Firms that adopted strict antipledging policies later raised CEO cash pay and stock awards, consistent with replacing a lost source of liquidity.
• Expect resistance where the tax stakes are highest. Firms led by high-tax-burden CEOs were slower to adopt antipledging policies and chose weaker versions when they did.

Underwood, J., & Yost, B. P. (2026). CEO tax lock-in and share pledging. The Accounting Review. Advance online publication. 10.2308/tar-2025-0006