84 Executive Stock Options, Corporate Cash Holdings and M&A Decisions (Datta et al., 2001; Croci and Petmezas, 2015). The control variables not only include the same variables as in Eq. (4) but also add in variables related to merger deals. Relative Size is the natural logarithm of the ratio of transaction value of M&A to total assets of the acquirer at the end of the fiscal year prior to the acquisition announcement. Private Target equals one if the target is a private firm defined by the SDC M&A database, and zero otherwise. Within-industry acquisition is an indicator that equals one if the acquirer and the target have the same three-digit SIC code, and zero otherwise. All Cash is a dummy variable that equals one if the M&A is paid with all cash, and zero otherwise. Competed equals one if there is more than one bidder, and zero otherwise. Hostile equals one if M&A is identified as hostile by the SDC M&A database, and zero otherwise. We provide more detailed definitions of these variables in the Appendix. In E.q. (5), the coefficient of Vega indicates how the market reacts to the ESOsinduced M&As conducted by non-cash-rich firms, and the coefficient of Vega×Cashrich represents the difference in market reaction to the ESOs-induced M&A decisions between cash-rich firms and non-cash-rich firms. Based on the second hypothesis, investors react more positively to ESOs-induced M&A decisions in cash-rich firms if they believe the excess cash holdings make the CEOs with ESOs more willing to conduct idiosyncratic risk taking through M&A activities, and then enhance firm value. Therefore, we predict the coefficient of Vega×Cashrich (β4) in E.q. (5) will be positive. 3.3.3 Future Profitability and Market Valuation Finally, we verify the role of excess cash holdings in firms conducting ESOs-induced M&As by analyzing the profitability and market valuation in the following year (t+1). If the effect of excess cash is more associated with precautionary motives, the ESOs-induced M&As encouraged by excess cash holdings would bring firms better performance in the future. We modify the model used in Harford et al. (2008), and present the 6th equation as follows: Industry – Adjusted per formancei,t+1 = γ0 + γ1 Industry – Adjusted per formancei,t-1 + γ2 MAi,t +γ3 Vegai,t-1+γ4 Deltai,t-1 + γ5 Cashrichi,t-1 + γ6 Vegai,t-1 × Cashrichi,t-1+ γ7 Deltai,t-1 × Cashrichi,t-1 + γ8 Vegai,t-1 × Cashrichi,t-1 × MAi,t + γ9 Deltai,t-1 × Cashrichi,t-1 × MAi,t + γ10 Salesi,t-1 + γ11 Aveleverage + γ12 Avesalegrowth + γ13 InsideOwni,t-1 +εi,t+1 , (6)
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