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

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