82 Executive Stock Options, Corporate Cash Holdings and M&A Decisions where MA is a dummy variable that equals one if the firm undertakes an acquisition. The definitions of Vega and Delta remain the same as in 3.2. Vega would make the CEO more likely to undertake M&As but Delta would have ambiguous effects (Datta et al., 2001; Croci and Petmezas, 2015). Cashrich is an indicator that equals one if firms have positive excess cash holdings, and zero otherwise. Cash ratios (Cash/TA) are defined as cash and short-term investments (Item CHE) over total assets (Item AT). Sales is defined as the logarithm of sales used to control for firm size. Market leverage is defined as the book debt divided by the market value of assets. Stock return is defined as a firm’s annual stock return. Market_to_Book is defined as market value over total assets (Item AT). EBITDA/ TA is defined as operating income before depreciation (Item OIBDP) scaled by total assets (Item AT). Industry M&A liquidity is defined as the sum of transaction value of M&A for each year and three-digit SIC code divided by total assets (Item AT) of all COMPUSTAT firms in the same three-digit SIC code and year. Herfindahl index is defined as the sum of the squares of the market shares of all firms sharing the same three-digit SIC. Market share is estimated as the sales of a firm (Item Sale) to the sum of sales within the industry. Meanwhile, given the managerial incentive may affect M&A decisions, we thus use insider ownership to control the effect of the agency problem associated with managerial opportunism (Harford et al., 2008).1 InsideOwn represents the insider ownership, which is measured as the ratio of shareholdings owned by top-five managers. We have also listed more detailed definitions of these variables in the Appendix. The bidding likelihood equation is estimated by the probit model that controls for the time fixed effect. The probit model is estimated by E.q. (4), and the coefficient of Vega (β1) represents the impact of vega on CEOs’ M&A decisions in non-cash-rich firms. The coefficient of Vega×Cashrich (β4) represents the difference in the effect of vega on M&A decisions between cash-rich firms and non-cash-rich firms, indicating how the excess cash affects the ESOs-induced M&A decisions. According to the first hypothesis, we predict the incentive effect of vega on CEOs to undertake M&As is greater in cash-rich firms than in non-cash-rich firms. That is, excess cash holdings make managers with ESOs more willing to conduct idiosyncratic risk-taking activity via M&As. We thus expect β4 in E.q. (4) would be positive. 1 In addition to insider ownership, we also use the entrenchment index (E-index) proposed by Bebchuk, Cohen, and Ferrell (2009) as the control variable for the impact of corporate governance. The unreported results using the E-index mostly remain consistent with our findings.
RkJQdWJsaXNoZXIy ODg3MDU=