Capital reduction, financial characteristics and corporate governance

This study investigated the short-term announcement effect and long-term performance of firms with capital reduction. With respect to the short-term announcement effect, we found that the cumulative abnormal returns (CARs) of the CAPM one-factor and the Fama-French (1993) three-factor pricing models of firms are all positively significant. For the long-term performance, the long-term CARs of firms with capital reduction are significantly higher than those of matched samples when the CAPM one-factor and the Fama-French (1993) three-factor pricing models are used in the first year after the event, but are not significantly higher than those of matched samples when the Carhart (1997) four-factor pricing model is used in the first year after the event. Our findings suggest that it is more objective to use the CAPM one-factor or the Fama-French (1993) three-factor pricing model to estimate firms' expected returns when matched samples are used to test the performance of firms with capital reduction, since using matched samples can control other factors in addition to capital reduction announcements. Moreover, regression analysis indicates that capital reduction, the industry, the debt ratio and the proportion of outside directors may affect the performance of firms with capital reduction only in the first year after the event.