Capital Reduction Exercise

[sgmystique]

Just wonder what would be the practical effect of a capital reduction exercise on the share price of a listed entity, especially when the capital reduction leads to the payment of a special dividend...

[specuvestor]

There are at least 2 types of capital reduction: 1) is to offset losses to start a clean slate on carried over losses (usually to facilitate future corporate actions) that require court approval to ensure the company is not being hollowed out or undercapitalised; and 2) like share buyback plus cancellation, is to reduce the amount of capital required by the company hence to improve ROE. Generally markets are receptive to 2) and these are actually part of the Structure Layer that usually doesn't affect the Asset or Business layers.

Markets differ for example in the past Taiwan is very adverse to 1) because it signals that the company give up / will not be able to make back the losses. But if there is a special dividend without affecting the underlying business, eg selling asset etc, then it should be positively received.