108 Executive Stock Options, Corporate Cash Holdings and M&A Decisions may respond favorably to ESOs-induced M&A decisions in cash-rich firms than in noncash-rich firms, especially for firms in the old economy. When further investigating future profitability, we find consistent results that cash-rich firms undertaking ESOs-induced M&A activities would have better profitability than those not conducting ESO-induced M&As. Overall, the role of excess cash holdings in firms conducting ESOs-induced risk taking is more associated with precautionary motives than agency incentives, but how the market values cash-rich firms conducting ESO-induced M&As still depends on a firm’s governance environment. This study verifies the link between ESO incentives and corporate cash holdings by simultaneously analyzing their impacts on corporate idiosyncratic risk taking. Our results not only contribute to the literature of ESOs compensation, corporate cash holdings and M&As, but also help corporations make appropriate decisions in their compensation and cash policies that can effectively encourage managers to conduct risk-taking activities and then enhance their future profitability.
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