Off-Track: The Disappearance of Tracking Stocks
Journal of Applied Corporate Finance, Forthcoming
24 Pages Posted: 7 Dec 2014
Date Written: October 27, 2014
Many companies issued tracking stock during the 1980s and 1990s. Tracking stock is a class of stock that should track the performance of a unit within a diversified corporation, while the shareholders of the parent retain ownership rights to the assets of the tracking unit. However, the majority of tracking stock has now been eliminated or dissolved. We found the dissolution announcement had a positive price reaction for both the parent and tracking unit stockholders. This suggests that tracking stocks were ultimately not value enhancing and financial managers should use caution when considering this unique type of capital structure. We found the positive reaction was related to the debt ratio and the method of dissolution for the parent shareholders and related to the size of the tracking unit relative to the parent firm for the tracking shareholders. We found no evidence abnormal returns are related to preserving internal capital markets. We discuss specific examples to shed further light on this defunct capital structure.
Keywords: Tracking stock, Targeted stock, Internal capital market, Capital structure
JEL Classification: G32, G39
Suggested Citation: Suggested Citation