Refixing Option and Privately-Placed BW Warrant Returns

Abstract

This paper examines 249 privately-placed bonds with warrants (BWs) where the related parties including largest shareholders purchase warrants from financial institutions. The major findings of this paper are as follows. First, the announcement effect is significantly negative. Second, the average return of exercising warrants is 1,441%. Out of this return, 674% is attributable to the refixing option. Third, the largest shareholders are able to select the best exercise timing due to information advantage. The cumulative abnormal return of 100 days prior to the exercise date is 29.32%. Fourth, the market reacts negatively when warrants are exercised. Korea is the only country where privately-placed BWs are issued with the refixing option. This paper presents evidence that warrant returns are extremely high due to the refixing option, thus we make a feasible recommendation that the benefit of the option is reduced or a different refixing range of the exercise price is applied in public or private placements.

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

“…Yoon [34] analyzes privately placed detachable BWs where the affiliated persons, including the largest shareholder, repurchase warrants and shows that the announcement effect is negatively significant and the affiliated persons can obtain additional return of 674% by using the refixing options. Based on these findings, Yoon [37] suggests to reduce the advantage of the refixing option or apply the differentiated refixing range of the exercise price.…”

“…This paper offers several contributions to the literature that differ from those of previous studies. Yoon [34,37] examines the market response to the refixing option and warrant-repurchase by the largest shareholder and affiliated persons, but limits the study to bonds with warrants, and analyzes data prior to August 2013, that is, before the detachable BWs were banned. Byun and Park [36] also analyze the announcement effect of CB offerings with the refixing option, but not those of BW offerings and covers CB announcements until 2015, a period before the rapid increase in CBs issuance.…”

Empirical Study on Prices, Trading Volumes, and Arbitrages of Listed Subscription Warrants

“…셋째, 본 연구는 리픽싱이 차익거래자가 이익을 얻을 수 있는 메커니즘이라는 것을 보여준다. 리픽싱이 투자자에게 과도하게 유리한 조항이며 BW에 리픽싱이 적용되는 국가는 우리나라가 유일하다는 점을 고려하면(Yoon, 2015a;Yoon, 2019a;Yoon, 2020), 감독당국은 이 조항에 대한 수정 또는 폐기를 검토할 시점으로 판단된다. 28) 먼저 BW발행기업의 비정상 공매도 거래와 장기성과에 대한 결과는 다음과 같다.…”