80 Executive Stock Options, Corporate Cash Holdings and M&A Decisions data from the Compustat database of the S&P Company, and stock returns from the Center for Research in Security Prices (CRSP). We collect the data of CEO compensation, CEO tenure, their equity portfolio holdings and insider shareholdings from the Excucomp database of the S&P. Last, we collect the data of merger and acquisitions from the M&A database of the Securities Data Company (SDC). Following the criteria of Harford and Uysal (2014), we exclude sample firms in financial industries (SIC code 6000-6999) and utility industries (SIC code 4900-4999) due to their special regulatory requirements. We also drop samples with sales under $10 million in 1990 dollars. For each M&A deal, we require all its completed domestic acquisitions specified in the SDC M&A database as a merger, which include acquisition of majority interest, asset acquisition, or acquisition of certain assets with transaction values over $1 million. Meanwhile, we exclude the M&A deal if the ratio of transaction value to the total assets of the acquirers is lower than 1%. Our final sample consists of 13,553 firm-year observations and 1,890 acquisitions. The observations are fewer than those in Harford and Uysal (2014) because we only include S&P 1500 firms. Meanwhile, we winsorize all variables at the 1st and 99th percentile to guarantee the outliers do not drive the results. 3.2 Measurement of ESO Incentives We follow prior literature (Core and Guay, 2002; Coles et al., 2006; Low, 2009) to measure ESO incentives, delta and vega. Delta is defined as the change in the dollar value of the CEO’s stock and options holdings for a one percentage change in the stock price. Vega is defined as the change in the dollar value of the CEO’s option holdings for a one percentage change in the stock return volatility. We apply the dividend-adjusted Black and Scholes (1973) formula from Merton (1973) to calculate the value of given European call options CEOs hold and show the formula as follows: Option Value = Se –dT N(d 1) – Xe –rT N(d 2) , (1) where S is the price of the underlying stock; X is the exercise price of the option; d is the natural logarithm of the expected dividend yield over the life of the option; r is the natural logarithm of a risk-free rate, which is the yield at the last day of each year of U.S Treasury Bond; T is the time to maturity of the option in the year; N is the cumulative probability function for the normal distribution; d1 = [ln(S/X) + T (r–d+σ 2/2)]/ σT(1/2); d 2 = d1– σT (1/2)
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