Abstract
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.
Highlights
The issuances of equity-linked debt have shown explosive growth in Korea
If market concerns about the refixing option that causes the dilution of shareholder value are valid and reasonable, I can expect that the market reacts negatively to the announcement of equity-linked debt issuance with embedded the refixing option
Refixing option denotes an adjustment right of the conversion price embedded in equity-linked debt when the underlying stock price falls under conversion price
Summary
The issuances of equity-linked debt have shown explosive growth in Korea. The issuance of equity-linked debt, which hit a low of 1.7 trillion won in 2014, more than tripled over the 4 years, reaching about 5.5 trillion won in 2018 (see endnote 1 in Appendix B). Billingsley et al [30], Jayaraman et al [31], and Roon and Veld [32] report positive or insignificant announcement effect of BW offerings Another concern of market participants is that a provision, refixing option, generally embedded in many recently issued equity-linked debts potentially makes the dilution of existing shareholders’ wealth worse. The stock market investors lower the value of firms issuing equity-linked debt with the refixing option by 2.6 to 2.7 percentage points in terms of the cumulative abnormal return over the period (−1, +1) around the announcement, compared to those without the refixing option This result indicates that market concern about the dilution of existing shareholder value due to the downward adjustment of conversion price resulting from the stock price.
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