Why Issue Tracking Stock? Insights from a Comparison with Spin-Offs and Carve-Outs

48 Pages Posted: 12 Dec 2000

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Imants Paeglis

Concordia University - John Molson School of Business

Date Written: June 2000

Abstract

We study the issuance of tracking stocks, a form of corporate restructuring that has recently become very popular, and compare it with spin-offs and equity carve-outs. We find that parents and subsidiaries of tracking stock firms are more related than those that undertake the other two forms of corporate restructuring, that there is a positive announcement effect (similar in magnitude to that of spin-off announcements) and that the number of analysts following the firm increases following the issuance of tracking stock. At the same time, we find a decline in the operating performance of firms subsequent to the issuance of tracking stock. We also find that firms issuing tracking stock underperform in the long-run relative to a portfolio of industry-matched firms and the market index. The long-term performance of tracking stocks is similar to that of equity carve-outs, but significantly worse than that of spin-offs. Our findings suggest that the main motivation for the issuance of tracking stock is the preservation of synergies between the business units involved and the control benefits accruing to firm management, while reaping the benefits of the better reflection of "hidden value" in the combined firm's equity market valuation.

Keywords: corporate governance, tracking stock, equity carve-outs, spin-offs, financial structure, corporate restructuring

JEL Classification: G32, G34

Suggested Citation

Chemmanur, Thomas J. and Paeglis, Imants, Why Issue Tracking Stock? Insights from a Comparison with Spin-Offs and Carve-Outs (June 2000). Available at SSRN: https://ssrn.com/abstract=250522 or http://dx.doi.org/10.2139/ssrn.250522

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Imants Paeglis

Concordia University - John Molson School of Business ( email )

Montreal, Quebec H3G 1M8
Canada

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