Why Do Firms Choose Refunds to Shareholders Through Capital Reduction?

In recent years, some firms have chosen capital reduction as a payout tool for returning cash to shareholders, and these firms have also engaged in large‐scale payouts, more than in dividends and stock repurchases. This study investigates the economic motives causing firms to adjust firm payout policies towards a distribution of cash through capital reduction. Using a logit model, we show that cash‐flow uncertainty, life cycle theory, insider interests, increasing EPS and government regulation could account for capital reduction payouts. The results for Taiwan reveal positive associations between capital reduction choice and earned/contributed capital mix and insider ownership, and negative associations with cash‐flow uncertainty and the growth rate of EPS. The findings suggest that in Singapore, firms with lower cash‐flow uncertainty and lower business freedom are significantly more likely to use capital reduction payouts.