An Empirical Study of Company Financial Characteristics with Capital Reduction by Cash
Date Issued
2010
Date
2010
Author(s)
Kuo, Lung-Fang
Abstract
One key element of the growth of an enterprise is capital formation and accumulation. Listed companies in Taiwan typically accumulate their capital through capital increase and ultimately expand the capital shares. A decrease in capital has traditionally been attached with negative connotation, however, the two incidences of capital reduction by cash of Formosa International Hotels Corporation at 2002 and 2006 had earned positive reflection by the market. These incidences altered the traditional thoughts and led to an upsurge in capital reduction by cash among companies in Taiwan. Now, capital reduction by cash has become the new trend for financial strategy.
Based on a study sample of listed companies in Taiwan that declared capital reduction by cash up until July of 2009, we conducted an empirical investigation among these firms that allows us to determine 14 capital financial indexes related to capital reduction by cash. By quantifying these indexes, we were able to study whether there were specific characters associated with companies that decreased their capital by cash and analyze whether there were significant differences in financial indexes between firms that declared capital reduction by cash and firms in the same industry.
Several financial characteristics specific to firms that utilized capital reduction were found:
1.The profits gained by firms that declared capital reduction by cash tend to be stable over time.
2.The average profitability of firms that declared capital reduction by cash was higher than firms in the same industry.
3.The average share capital of firms that declared capital reduction by cash was higher than firms in the same industry.
4.The debt-to-equity ratio of firms that declared capital reduction by cash tended to be low and it was significantly lower than the average ratio of firms in the same industry.
5.The current ratio of firms that declared capital reduction by cash was high and it was higher than the average ratio of firms in the same industry.
6.The cash outflow of short term debt and capital expenditure of firms that declared capital reduction by cash was mainly from operating activities. The cash flow ratio was higher than the average ratio of firms in the same industry.
7.Firms that declared capital reduction by cash exhibited a low rate of incurring capital expenditure.
8.The revenue growth of firms that declared capital reduction by cash was low and it was lower than the average revenue growth of firms in the same industry.
9.The cash dividend rate of firms that declared capital reduction by cash was higher than the average rate of firms in the same industry.
10.Firms that declared capital reduction by cash has higher rate of cash balance.
Subjects
capital reduction by cash
financial characteristic
financial index
capital deduction ratio
Type
thesis
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