79 NTU Management Review Vol. 31 No. 1 Apr. 2021 Hypothesis 2: The effect of excess cash holdings on the ESOs-induced M&A decisions would be more profound for firms in the old economy than those in the new economy. When we consider corporate cash holdings to support ESO-induced risk taking, a potential argument would be the agency problem of overinvestments (Jensen, 1986). Excess cash holdings may cause the possibility of excess investments and induce managers to attempt value-decreasing M&As (Harford, 1999; Richardson, 2006). Although past cash-related studies demonstrate the agency problems of excess cash holdings, the precautionary motive of cash holdings might dominate the agency incentive when the idiosyncratic risk is high and/or when firms undertake the risky investments like those in R&Ds (Bates et al., 2009; McLean, 2011). Meanwhile, one important motive for firms conducting acquisitions is to obtain additional innovation capabilities or to pursue R&D competitiveness (Phillips and Zhdanov, 2013; Bena and Li, 2014). That is, when firms use excess cash holdings to support the ESO-induced idiosyncratic risk through M&As, such ESOs-induced M&As would be more associated with precautionary motives, rather than with managerial spending. Moreover, Harford, Mansi, and Maxwell (2008) demonstrate only the combination of excess cash holdings and weak corporate governance may induce overinvestment and then the subsequent underperformance. In other words, firms with excess cash do not necessarily conduct value-decreasing decisions unless they are under poor governance. Therefore, we make our third and the last predictions as follows. Hypothesis 3: Investors would react more favorably to ESO-induced M&As in cash-rich firms than those in non-cash-rich firms. Hypothesis 4: For cash-rich firms, managers encouraged by the incentive compensation and excess cash to conduct M&As would create better performance than those without undertaking M&A decisions. 3. Empirical Design 3.1 Data and Sample Constructed from four data sources, our sample covers U.S. firms indexed in the Standard & Poor’s (S&P) 1500 index from 1992 to 2014. We obtain the financial variables
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