• Can Shareholders Benefit from Cash Refund Capital Reduction? The Analysis via the Value of Cash Holdings

Abstract

Purpose – This study investigates how the market identifies the managerial implication behind cash refund capital reduction (CR) by exploring the impact of CR decision on the value of additional post-payout cash and on the cash usage after the payouts.

Design/methodology/approach – This research modifies the model of Pinkowitz et al. (2006) by taking the impact of CR decision into account. The empirical results are estimated using an OLS regression that controls for the time and industry fixed effects and is adjusted with the robust standard errors for heteroscedasticity.

Findings – The impact of CR decisions on the valuation of additional post-payout cash varies with the corporate life cycle stage and a firm’s governance environment. As firms are at a more mature life stage, the CR choice is related to a higher market valuation of additional cash after the payouts than the repurchasing decision. However, when firms are at a younger life stage, the difference in the cash valuation between CR and repurchasing firms change with their governance status. The more positive impact of CR decision in well governed young firms is more associated with the efficiency improvement in cash usage.

Research limitations/implications – This research complements existing CR literature by clarifying the managerial rationale for CR payout via the analysis of cash valuation. Meanwhile, these results also fill the gap in CR literature by exploring how CR decisions improves corporate efficiency in cash usage.

Practical implications/Social implications – The findings of this research not only show how the market investors recognize the implication behind the CR decision, but also alter managers to the importance of choosing an appropriate payout mechanism.

Originality/value – The research adds to the CR literature by providing an alternative perspective via the cash valuation channel. It echoes to prior studies that the managerial rationale of making flexible payout choice matters to a firm’s future cash usage as well as its cash value.

Keywords –  Cash refund capital reduction, Value of cash holdings, Flexible payouts