Announcement Effects of Convertible and Warrant Bond Issues with Embedded Refixing Option: Evidence from Korea

This study examines the announcement effects of convertible and warrant bond issues with embedded refixing option in Korea from January 2001 to December 2018. Refixing option denotes an adjustment right of the conversion price embedded in equity-linked debt when the underlying stock price falls under conversion price. I find statistically significant declines of 2.6 to 2.7 percentage points in cumulative abnormal returns for the inclusion of a refixing clause and especially further declines of 6.2 to 6.3 percentage points during the period from 2016 to 2018. This result implies that the market’s concerns about the dilution of existing shareholder value due to the exercise of the refixing rights are reflected in the market response. I further find that the degree of negative market response varies according to the changes in macroeconomic conditions and the stock exchange on which the issuing firms are listed. The findings are robust after controlling for the effect of firm-, issue-, and market-specific characteristics.