Information Content and Intra-industry Effects of Cash Refund Capital Reduction Announcements in Taiwan

Capital reduction through returning cash to shareholders is one mechanism by which firms distribute their surpluses. While distribution of excess funds can lower agency costs, it may also signal a decline in the firm's future investment opportunities. In this paper, we examine the information content and information transfer effects of the announcement of capital reduction and cash distribution in Taiwan during the period 2002–2010. We find that there is a significantly positive market reaction when Taiwanese firms announce a reduction in their capital and return cash to shareowners. We also document contagion intra-industry effects by showing that portfolios of rival firms in the same industry experience a significant and contemporaneous positive stock price performance. Consistently, our results support the free cash flow hypothesis of contagion intra-industry effects in the long-run stock return and operating performance of firms following cash refund capital reduction announcements. Moreover, multivariate analysis indicates that these contagion effects are influenced by competitors' features, which are negatively correlated with competitors' size and growth opportunity, and positively influenced by their dividend policy and ownership structure.