102 Executive Stock Options, Corporate Cash Holdings and M&A Decisions Since corporate governance is one of the critical determinants for corporate decisions and matters regarding how the market evaluates corporate activities, we then investigate whether governance environment impacts the future performance effect. We use insider ownership to measure a firm’s governance environment. Given almost half of our sample has positive insider ownership, a firm with positive insider ownership (zero insider ownership) is defined as a well (poorly) governed firm. The analyses are shown in Table 8. Panels A and B reveal the results based on different performance measures. When taking the effect of corporate governance into account, the coefficients of Vega×Cashrich×MA under the profitability measure are significantly positive in both well governed and poorly governed firms, fully supporting the fourth hypothesis. The effect of excess cash holdings on the ESO-induced M&A decisions is more associated with the precautionary motive, so managers encouraged by ESOs and excess cash holdings to undertake M&A decisions can create higher profitability than those not conducting M&As, even though their firms are not well governed. Through the difference test, we do not find evidence to support the profitability effect for cash-rich firms conducting ESOs-induced M&As would vary with a firm’s governance environment. Under the market-to-book ratio, corporate governance matters to the market valuation. A poorly governed environment would intensify investors’ concern about the managerial incentive, so investors would consider the ESOs-induced M&As conducted by cash-rich firms are more related to managerial incentive and more likely value-decreased. Therefore, they give significantly negative feedback to cash-rich firms undertaking ESOsinduced M&As (-1.160 and -1.779, significant at the 1% and 5% level in panel B), even though these firms can have better operating performance (0.0785 and 0.0625, significant at the 10% level in panel A). On the other hand, the coefficients of Vega×Cashrich×MA in well governed firms are still insignificantly positive. Through the difference test, we find significant evidence that how the market values ESOs-induced M&As conducted by cashrich firms is highly associated with their corporate governance environment. Consequently, while the results demonstrate cash-rich firms undertaking ESOsinduced M&A activities are mostly related to precautionary motives and likely to enhance their operating performance, how the market values these firms’ future valuation still varies with their corporate governance environment.
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