Reset Feature in Convertible Bonds: Is It Good for the Firm?

This study analyzes the impact of the reset clause in convertible bonds on firms. Specifically, it investigates whether the reset feature helps alleviate capital constraints, whether this effect varies based on the controlling shareholders’ ownership stake, and how the reset feature influences the long-term performance of firms. The analysis is based on convertible bond issuances by firms listed on the Korean Stock Exchange and KOSDAQ between 2000 and 2020. The results are as follows. First, firms without the reset feature at the time of convertible bond issuance experience a higher level of capital constraint alleviation. Second, the effect of this capital constraint alleviation is not affected by the ownership stake of the controlling shareholders. Finally, the reset feature negatively impacts the long-term performance of firms. The study suggests that small and medium-sized enterprises with high growth potential might benefit from avoiding the use of the reset clause when issuing convertible bonds. This study contributes to the literature by offering the first robust empirical analysis of the reset clause, providing valuable insights into its impact and implications. These findings are expected to inform and enhance policy discussions surrounding the use of reset clauses in convertible bonds.