Do Tracking Stocks Reduce Informational Asymmetries? An Analysis of Liquidity and Adverse Selection

25 Pages Posted: 29 Feb 2004 Last revised: 16 Nov 2008

See all articles by John Elder

John Elder

Colorado State University

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Jang-Chul Kim

Northern Kentucky University - Haile/US Bank College of Business

Date Written: April 8, 2004

Abstract

A firm's announcement that it intends to restructure based on tracking stock is usually associated with a positive and significant stock price reaction, at least in the short-run. Typically, this reaction has been attributed to expected reductions in a diversification discount, via reduced agency costs and/or reduced informational asymmetries. The existing literature has investigated this latter hypothesis - the impact of tracking stocks on informational asymmetries - by focusing on the behavior of equity analysts: the number following the specified firms and the accuracy of their forecasts. The results thus far have been inconclusive. In contrast, we focus on the behavior of market makers. In particular, we analyze the liquidity provided by market makers, as measured by the bid-ask spread, before and after a firm issues a tracking stock. Our results provide additional support to the growing evidence that restructurings based on tracking stocks are not effective at reducing informational asymmetries. Rather, firms that issue tracking stocks tend to exhibit less liquidity and greater adverse selection than a matched sample of control firms.

Keywords: Tracking stock, bid-ask spreads, restructuring

JEL Classification: G14, G34

Suggested Citation

Elder, John and Jain, Pankaj K. and Kim, Jang-Chul, Do Tracking Stocks Reduce Informational Asymmetries? An Analysis of Liquidity and Adverse Selection (April 8, 2004). Journal of Financial Research, Vol. 28, No. 2, 2005, Available at SSRN: https://ssrn.com/abstract=510385

John Elder (Contact Author)

Colorado State University ( email )

Dept of Finance & Real Estate
1272 Campus Delivery
Fort Collins, CO 80523
United States
970-491-2952 (Phone)

HOME PAGE: http://lamar.colostate.edu/~jelder

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Jang-Chul Kim

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Accounting, Finance, and Business Law
Highland Heights, KY 41099
United States
859-572-1486 (Phone)

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