Market responses to cash dividends distributed from capital reserves

Yen-Yu Liu and Pin-Sheng Lee

Finance Research Letters, 2022, vol. 46, issue PB

Abstract: Companies were once only allowed to distribute cash dividends from retained earnings. How will markets respond if they are allowed to distribute cash dividends from capital reserves? In Taiwan, companies have recently been permitted to directly distribute cash dividends from capital reserves instead of retained earnings. This study provides a new approach to the utilization of capital reserves. The findings can be summarized as follows: (1) Just like traditional cash dividends distributed from retained earnings, variations in the dividend payout ratio are positively correlated with market responses if cash dividends are distributed from capital reserves; and (2) markets present a lower evaluation of cash dividends distributed from capital reserves than those distributed from retained earnings.

Keywords: Capital reserves; Cash dividends; Dividend policy (search for similar items in EconPapers)
JEL-codes: G14 G35 M41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321003895

DOI: 10.1016/j.frl.2021.102389

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