90 Executive Stock Options, Corporate Cash Holdings and M&A Decisions In addition, the coefficient of the interaction of vega with the excess cash indicator (Vega×Cashrich) is significantly positive (0.0758, significant at 10% level), indicating the likelihood of undertaking an ESOs-induced M&A is 7.58% higher in cash-rich firms than in non-cash-rich firms. That is, one unit of risk incentive (vega) granted to managers in cash-rich firms increases the likelihood of undertaking an acquisition by 14.51% (6.93+7.58) relative to the sample mean. This finding supports the first hypothesis. Firms with excess cash are more capable of bearing higher idiosyncratic risk, and thus their managers are more responsive to the risk incentive of ESOs by undertaking M&A activities. In other words, the cautionary protection of corporate cash holdings provides the risk-averse managers greater capability to defend against unexpected shocks, so they are more willing to conduct investments with uncertainty and long-term impact. Since this study attempts to examine the effect of excess cash on ESOs-induced M&A decisions, we then focus on the deals with all-cash payments to ensure the M&A decision is closely involved with corporate cash holdings. The results are exhibited in column 2. While the coefficient of Vega is still significantly positive, the coefficient of Vega×Cashrich becomes insignificantly positive, which does not statistically support the first hypothesis. Given Armstrong and Vashishtha (2012) suggest the effect of vega on risk-taking decision is more associated with systematic risk and the systematic risk after M&A activities could be increased or decreased, we then exclude the deals where acquirers and targets are in different industries (Within-industry acquisition = 0) to control for the impact of systematic risk in our analysis. When we exclude the deals in different industries, the post-merger systematic risk acquirers face is similar to the risk condition before the deal. Therefore, acquirers are still able to hedge or control the change in systematic risk. In this case, the uncertainty following the M&A activity would be more associated with idiosyncratic risk. The results in columns 3 and 4 show the analyses for the within industry sample and the within industry sample involving in all-cash deals. When controlling for the effect of systematic risk, the coefficients of Vega×Cashrich are significantly positive (0.0606 in column 3 and 0.0498 in column 4, both significant at 5% level), again supporting our first hypothesis. Due to the endogenous nature of compensation incentives documented by prior research, we further estimate our empirical equations using two-stage least squares estimation. Following prior studies (Liu and Mauer, 2011; Amstrong and Vashishtha, 2012), we first separately regress compensation incentives (vega and delta) on all control
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