Abstract
This study incorporates different capital reduction on IC design Industry in Taiwan, to evaluate the external announcement effect and the internal operating performance by differing category, such as capital reduction to write off accumulated losses, cash refund capital reduction, and capital reduction by stock repurchases. The event-study methodology is used for the external analysis to explore the market response toward the announcements, and the Modified Five-factor Du Pont Formula is used for the internal analysis to measure the long-run operating performance after capital reduction. Based on the market announcement effect, the empirical results show that capital reduction to write off accumulated losses appears negative abnormal returns. It means that the investors don't think the prospects of such firms appear to be brightening. Cash refund capital reduction shows the positive effects after declaration, revealing that the securities market still gives higher rating to companies reducing capital by cash. And capital reduction by stock repurchases shows no effect after declaration. Based on the long-run operating performance, capital reduction to write off accumulated losses increases its return on equity and operating profit margin in event year but then declines, while capital turnover gets worse and the rest of the ratios have no significant difference between two variables (before versus after).To sum up, capital reduction to write off accumulated losses doesn't result in improved long-run operating performance after capital reduction. Perhaps due to too small sample size, there is no significant difference observed through statistical test among cash refund capital reduction firms. As to Capital reduction by stock repurchases, it goes down on its Return on equity and Operating profit margin, however only few years appear significant difference, and the rest of the DuPont ratios have no significant difference. The results indicate that Capital reduction by stock repurchases has limited influence on companies' long-run operating performance.