Executive Stock Options, Corporate Cash Holdings And M&A Decisions

This study examines the effect of corporate cash holdings on the risk-taking activities induced by executive stock options (ESOs). Using mergers and acquisitions (M&As) as the proxy of corporate decisions more associated with idiosyncratic risk taking, we find excess cash holdings stimulate the M&A bidding probability induced by the risk incentive of ESOs (vega). The probability of conducting ESOs-induced M&As in cash-rich firms is 7.58% higher than that in non-cash-rich firms. The positive impact of excess cash on the ESOs-induced M&A decisions is more pronounced in firms with low leverage and those in the old economy. Through analyses of the announcement effect and the one-year profitability effect, our results show the market considers the ESOs-induced M&A decisions made by cash-rich firms are more associated with precautionary motives rather than agency incentives. However, while cash-rich firms undertaking ESOs-induced M&As have better profitability than those not conducting ESOs-induced M&As, how the market assigns future valuations to cash-rich firms conducting ESOs-induced M&As still depends on the corporate governance environment of these firms.