106 Executive Stock Options, Corporate Cash Holdings and M&A Decisions 5. Conclusion This study examines whether excess cash holdings can enlarge the incentive effect of ESOs on idiosyncratic risk taking by analyzing corporate M&A activities. There are three critical points to build our arguments. First, the risk incentive of ESOs (vega) could increase managerial risk taking, especially for systematic risk but not for idiosyncratic risk because CEOs can only trade the market portfolio to hedge systematic risk. However, idiosyncratic risk is highly related to a firm’s long-term development. Second, while M&As are one type of critical investments for a firm’s economic growth, the greater concern about the post-merger idiosyncratic risk relative to systematic risk may make managers more risk averse and then hesitate to conduct M&A activities. Third, excess cash holdings enable firms to bear greater idiosyncratic risks and pursue more persistent investments because cash assets can serve as the precautionary buffers to defend against Table 9 Robustness Test: The Contracting Effect Panel A: Leverage Dep: MA t Highly Levered Firms Low-Leverage Firms (1) (2) (3) (1) (2) (3) Full Sample All-Cash Deals Within Industry Deals Full Sample All-Cash Deals Within Industry Deals Vega t-1 Delta t-1 Cashrich t-1 . Vega×Cashrich P-value on the diff. in High vs. Low Delta×Cashrich 0.103** (2.50) 0.00438 (0.44) 0.0160 (1.36) -0.0731 (-1.07) 0.025 0.00789 (0.49) 0.0660** (2.37) -0.00498 (-0.69) 0.00868 (1.05) 0.00803 (0.18) 0.400 -0.00256 (-0.21) 0.0724** (2.32) -0.000785 (-0.10) 0.0183** (2.01) -0.0945* (-1.74) 0.001 0.00926 (0.74) 0.0321 (0.71) 0.00197 (0.21) -0.0717*** (-4.80) 0.144*** (2.64) -0.0104 (-0.86) 0.0128 (0.35) 0.000253 (0.03) -0.0254** (-2.18) 0.0786* (1.86) -0.00194 (-0.20) 0.0384 (1.08) 0.0142** (1.97) -0.0666*** (-5.35) 0.130*** (3.01) -0.00952 (-1.01) Controls Year fixed effect Number of observations R-squared Yes Yes 6,776 0.023 Yes Yes 6,295 0.040 Yes Yes 6,368 0.023 Yes Yes 6,777 0.026 Yes Yes 6,172 0.047 Yes Yes 6,252 0.044
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