Oftentimes, margin accounts are created so executives can use their stock for personal investments or loans without having to sell shares, which could be viewed negatively by investors and lead to capital gains tax. However, violations of company bylaws by Green Mountain's Stiller, the liquidation of McClendon's stock, and the prospect of a share liquidation by Goldman executives all stand as a clear indication that forced selling can impact investors.
"It's okay for CEOs to leverage their stock if it's used to invest in more shares. But if it's used for personal consumption, then it's probably a problem," adds David Yermack, a professor at NYU's Stern School of Business.
In the event of a share slump or overall market turmoil, though, the distressed sale of those shares can create the potential for insider trading, conflicts of interest and even put boards in the awkward position of bailing out top company officials.
"I don't think there is anything fundamentally wrong with this as long as it's disclosed and the board approves it," says David Larcker, an accounting professor at the Stanford Graduate School of Business and director of its Corporate Governance Research Program. "I think it is very controversial where the board would step up and bail out
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