In the Korean convertible bond market, there is a refix option that allows for the adjustment of the conversion price according to a fall in stock prices. This is a unique system in Korea. In this study, we look into how a refix clause of convertible bonds impacts the wealth of shareholders, and analyzed whether the aim of this clause, which is to protect investors, is valid. The refix option is a system where the conversion price of convertible bonds is pulled down when the stock price falls after the security’s issuance. For investors, this could be beneficial, as the number of stocks one can receive increases despite a fall in stock prices. However, for shareholders, it can mean dangers of stock dilution, resulting from an increase in the number of issued stocks. This paper analyzes the impact of refix clauses on shareholders, by studying the existence or nonexistence of refix effect and the announcement effect of refix clauses. Study results are as follows: First, a higher negative market response was observed after an announcement to issue a convertible bond with a refix clause. Second, the market also responded negatively even at the point in time that a refix in price actually occurs, which suggests that “refixing” of convertible bonds undermines wealth of actual shareholders. Third, it was found that the announcement effect less negative as the share of the majority shareholder goes higher, which points to a correlation between the share of the majority shareholder and the refix clause. Compared to the United States and other developed countries, the current refix clause in Korea seems to excessively focus on the protection of convertible bond investors, and there seems to be room for improvements in the future.
JEL Classification: G14, G30
Keywords: Convertible Bond; Cumulative Abnormal Returns; Refixing Option
