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
encouraged by ESOs and excess cash holdings to undertake M&A decisions can create better operating performance than those not conducting M&As. In other words, the role of excess cash in managers making the ESOs-induced M&A decisions is more related to precautionary motives rather than agency incentive. In panel B, the results are estimated based on the market-to-book ratio. The coefficients of Vega×Cashrich×MA are insignificantly negative. On the whole, these findings may suggest although investors do not consider the ESOs-induced M&As in cash-rich firms are necessarily driven by managerial incentive, they are still more concerned about the agency problem and thus provide less favorable feedback. Therefore, our results in Table 7 only marginally support the fourth hypothesis.
Table 6 Announcement Effect of M&As for Firms in the Old and New Economy
Panel A: Firms in Old Economy
Dep: CAR(-2,+2)
Within Industry &
All-Cash Deals
Vegat-1
Deltat-1
Cashricht-1
Vega×Cashrich Year fixed effect Number of observations R-squared
Panel B: Firms in New Economy
Dep: CAR(-2,+2)
(1) (2) (3) (4)
Full Sample
All-Cash Deals
Within Industry Sample
Within Industry &
All-Cash Deals
Vegat-1
Deltat-1
Cashricht-1
Vega×Cashrich Delta×Cashrich Cash/TAt-1
0.0746*
(1.95) 0.00264 (0.46) 0.00936 (0.68) -0.0754*
(-1.75) 0.00257 (0.36) -0.0620***
0.107**
(2.10) 0.00782 (1.14) 0.0132 (0.70) -0.0766 (-1.40) 0.0104 (1.18) -0.0515
0.0924**
(1.99) 0.00807 (1.17) 0.0132 (0.75) -0.114*
(-1.94) 0.00741 (0.80) -0.0432
0.121*
(1.76) 0.00990 (1.08) 0.0127 (0.52) -0.0878 (-1.31) 0.00503 (0.42) -0.0458
Controls Year fixed effect Number of observations R-squared
Yes Yes 394 0.148
Yes Yes 190 0.312
Yes Yes 254 0.171
Yes Yes 120 0.403 Note: This table examines whether the market responds differently to ESOs-induced M&A decisions conducted
by firms in different industry economies. All variables are defined in the same way as shown in the Appendix. Panel A exhibits the results for firms in the old economy while panel B shows the results for new-economy firms. The results are estimated based on the OLS regression model with standard errors that are robust and control for time and firm clustering. The t-statistics are reported in parentheses. ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.
Table 6 Announcement Effect of M&As for Firms in the Old and New Economy (cont.)
Table 7 Future Performance Effect
Panel A: Industry-Adjusted ROA Panel B: Industry-Adjusted M/B
(1) (2) (3) (1) (2) (3)
Cashrich t-1
. InsideOwn t-1
0.0358*** Year fixed effect
Number of observations R-squared Note: The table investigates the one-year performance for cash-rich firms undertaking the ESOs-induced M&As.
The dependent variables are industry-adjusted profitability (Industry-adjusted ROA) and industry-adjusted market-to-book ratio (Industry-adjusted M/B). Independent and control variables are defined in the same way as shown in the Appendix. Panels A and B demonstrate the analyses base on different performance measures. The results are estimated by the OLS regression model with standard errors that are robust and control for time and firm clustering. The t-statistics are reported in parentheses. ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.
Since corporate governance is one of the critical determinants for corporate decisions and matters regarding how the market evaluates corporate activities, we then investigate whether governance environment impacts the future performance effect. We use insider ownership to measure a firm’s governance environment. Given almost half of our sample has positive insider ownership, a firm with positive insider ownership (zero insider ownership) is defined as a well (poorly) governed firm. The analyses are shown in Table 8.
Panels A and B reveal the results based on different performance measures.
When taking the effect of corporate governance into account, the coefficients of Vega×Cashrich×MA under the profitability measure are significantly positive in both well governed and poorly governed firms, fully supporting the fourth hypothesis. The effect of excess cash holdings on the ESO-induced M&A decisions is more associated with the precautionary motive, so managers encouraged by ESOs and excess cash holdings to undertake M&A decisions can create higher profitability than those not conducting M&As, even though their firms are not well governed. Through the difference test, we do not find evidence to support the profitability effect for cash-rich firms conducting ESOs-induced M&As would vary with a firm’s governance environment.
Under the market-to-book ratio, corporate governance matters to the market valuation. A poorly governed environment would intensify investors’ concern about the managerial incentive, so investors would consider the ESOs-induced M&As conducted by cash-rich firms are more related to managerial incentive and more likely value-decreased.
Therefore, they give significantly negative feedback to cash-rich firms undertaking ESOs-induced M&As (-1.160 and -1.779, significant at the 1% and 5% level in panel B), even though these firms can have better operating performance (0.0785 and 0.0625, significant at the 10% level in panel A). On the other hand, the coefficients of Vega×Cashrich×MA in well governed firms are still insignificantly positive. Through the difference test, we find significant evidence that how the market values ESOs-induced M&As conducted by cash-rich firms is highly associated with their corporate governance environment.
Consequently, while the results demonstrate cash-rich firms undertaking ESOs-induced M&A activities are mostly related to precautionary motives and likely to enhance their operating performance, how the market values these firms’ future valuation still varies with their corporate governance environment.
Table 8 The Effect of Corporate Governance on the Future Performance
Panel A: Industry-Adjusted ROA
Dep: IAROA t+1 Well Governed Firms Poorly Governed Firms
(1) (2) (3) (1) (2) (3)
Cashrich t-1
.
Vega×Cashrich Delta×Cashrich Vega×Cashrich×MA
P-value on the diff. in Well vs. Poor Delta×Cashrich×MA
Year fixed effect Number of observations R-squared
Table 8 The Effect of Corporate Governance on the Long-Term Performance (cont.)
Panel B: Industry-Adjusted M/B
Dep: IAM/B t+1 Well Governed Firms Poorly Governed Firms
(1) (2) (3) (1) (2) (3)
Cashrich t-1
.
Vega×Cashrich Delta×Cashrich Vega×Cashrich×MA
P-value on the diff. in Well vs. Poor Delta×Cashrich×MA Year fixed effect
Number of observations R-squared Note: The table examines whether the governance environment matters to the one-year future performance for cash-rich
firms undertaking the ESOs-induced M&As. All variables are defined in the same way as shown in the Appendix. A firm is defined as well governed firms if the firm has a positive insider ownership (InsideOwn >0); otherwise, a firm is classified as poorly governed firms. Panels A and B demonstrate the analyses base on different performance measures.
The results are estimated based on the OLS regression model with standard errors that are robust and control for firm and time clustering. The t-statistics are reported in parentheses. ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.