Cash holdings, stock splits, and mergers: Examining risk and return in the equity markets

Chapter one of my Ph.D. thesis focuses on the implications of corporate cash holdings. As a low-returning asset, previous literature has theorized that holding excess cash should harm firm value. This appears to be true amongst large firms. However, amongst small firms, we find that market returns rise with cash ratios. These higher returns are not due to any known risk factors. Evidence supports the theory that the outperformance results from the easing of financial constraints upon these firms. The results are most robust for small, growth-oriented firms, who have the most difficulty accessing capital markets and could benefit the most from holding cash.;Chapter two focuses on stock splits and the resulting clientele shift in stock ownership. We find that split executions attract purchases from individual investors, in particular less sophisticated ones and those who have not previously owned split stocks. Meanwhile, institutions reduce their aggregate purchases. This results in a shift in investor clientele after stock splits. Our evidence indicates that corporate managers are successful in using stock splits to attract new investors. However, we find little support for improved liquidity after splits, even for small sized trades. Changes in liquidity and brokerage sponsorship cannot explain why individuals favor split stocks.;Chapter three focuses on the risk profile of merger arbitrage strategies. Previous research on merger arbitrage portfolios show them to have low betas or nonlinear betas, with systematic risk close to zero in flat to rising markets but high in downturns. This paper tests a two-factor model where a merger arbitrage risk factor, which proxies for deal completion risk, augments the market risk factor. Results for the two factor model show that market beta cannot be distinguished from zero, while the merger arbitrage factor is highly significant. Furthermore, incorporating the merger arbitrage risk factor reduces the alpha to zero. Finally, we see a shift in factor loadings from the period prior to the merger announcement and the period between the announcement and completion. Market beta adequately explains returns in the preannouncement period, but the merger arbitrage factor is superior once stocks enter the post-announcement period.