98 Executive Stock Options, Corporate Cash Holdings and M&A Decisions Moreover, we examine whether the industry economy matters to the market response to the ESOs-induced M&A. The results are shown in Table 6. Panels A and B exhibit the results for the old economy sample and new economy sample, respectively. In panel A, we find marginal evidence that investors may respond more favorably to cash-rich firms in the old economy undertaking ESOs-induced M&A activity (0.078 in column (2), significant at 5% level), indicating investors consider excess cash holdings enable firms in the old economy to defend the uncertainty after the ESOs-induced M&A decisions, rather than pursue managerial spending. In Panel B, the coefficients of Vega are significantly positive and the coefficients of Vega×Cashrich are statistically negative (-0.0754 in column (1) and -0.114 in column (3), both significant at 10% level). That is, the market would respond positively to ESOs-induced M&As undertaken by non-cash-rich firms in the new economy, but the response would be less favorable and even negative if the ESOs-induced M&As are conducted by cash-rich firms. Overall, we find marginal evidence supporting our third hypothesis that the market favorably recognizes the effect of excess cash on ESOs-induced M&A decisions, and such recognition is more pronounced for firms in the old economy. 4.4 Future Profitability and Market Valuation The results in Table 5 and Table 6 provide marginal evidence that the market recognizes firms with excess cash that conduct ESOs-induced M&A activities do not necessarily harm the firm value. However, one may argue investors may not realize the managerial problems behind the M&A deals until acquirers gradually underperform. Accordingly, we then investigate future performance to verify whether the effect of excess cash holdings on ESO-induced M&A decisions is more related to precautionary motives or managerial incentives. Following Harford et al. (2008), we use a firm’s profitability and market-to-book ratio relative to industry median as our measures. The analyses are exhibited in Table 7. The results in panel A are estimated based on the profitability measure. Empirically, the coefficients of Vega×Cashrich×MA are significantly positive, implying managers
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