Payout Policy in Taiwan: Cash Dividends, Stock Repurchases and Capital Reduction

Abstract

Taiwanese firms occasionally make stock repurchases or reduce capital as alternative forms of paying earnings in place of distributing cash dividends. Nonetheless, paying cash dividends is still the dominant form of payout. We examine the three payout methods from the perspectives of a firm's life-cycle stages and its capital structure by investigating TWSE-listed firms over 2000-2010. We find some impressive evidence in the Taiwan market. First, both the number of payout firms and the aggregate amount of payouts increased significantly, yet stably. Second, both earnings and payouts are highly condensed among the largest firms. Third, payout firms have a significantly higher ratio of retained earnings to equity, supporting the life-cycle theory of DeAngelo, DeAngelo and Stulz (2006). Fourth, firms making repurchases without paying cash dividends are less mature than other payers. Finally, firms conducting capital reduction are more mature than other payers, and they establish such a process in an attempt to adjust the capital structure. We provide evidence that the choice of payout method interacts with a firm's capital structure.