First, PayPal doesn't like it when your dispute ratio increases. The best way to handle disputes as a merchant is just to give the customer what they want. Most times this is a refund.

Second, when fraud occurs most PayPal users dispute any transactions as soon as they get their account back.

Third, You cannot refund a payment from a held or rolling hold balance. PayPal retroactively applied a rolling hold to our account of ~30% of our monthly gross transactions for a rolling 90 days. The way this works on PayPal, at least at that time, means that until your rolling hold balance is equal to 30% of your last 90 days transactions any funding of and payments into the account IMMEDIATELY get sucked into that rolling hold. We would auto flush the completed transaction account balance nightly. So now we're in a situation where trying to refund a customer wants you to add funds to your account, but as soon as the funds are added they are applied to the rolling hold. So, you click Refund on the dispute and you're unable to refund it. Eventually the dispute is automatically closed in their favor and the account balance goes negative. At that point you can fund the account and it'll apply to the negative balance first.

This was my experience at least, and trust me it was one of the most stressful events I ever encountered. Most of that stress was not knowing what was going on and why, and trying to get anything out of PayPal. Their processes are so opaque for merchants in many cases.