Institutional Trading, Information Production, and the Choice Between Spin-Offs, Carve-Outs, and Tracking Stock Issues

37 Pages Posted: 17 Mar 2007 Last revised: 19 Jul 2010

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Date Written: July 2010

Abstract

We analyze a firm's choice between spin-offs, equity carve-outs, and tracking stock issues and the role of institutional investors in corporate restructuring. We model a firm with two divisions. Insiders have private information about firm value and face an equity market with retail and institutional investors. We show that restructuring increases information production by institutional investors (relative to that about the consolidated firm): the highest increase in information production arises from spin-offs, the next highest from carve-outs, and the lowest from tracking stock issues. Insiders with the most favorable private information implement spin-offs; those with less favorable private information implement carve-outs; those with even less favorable private information implement tracking stock issues; and those with unfavorable private information remain consolidated. We explain the positive announcement effect and increase in analyst coverage associated with all three forms of restructuring. Our model also generates a number of novel testable predictions for firms' choice between spin-offs, carve-outs, and tracking stock issues, and for institutional trading around these three forms of restructuring.

Keywords: restructuring, corporate spin-offs, equity carve-outs, tracking stock issues, institutional trading, information production

JEL Classification: C72, D82, G14, G34

Suggested Citation

Chemmanur, Thomas J. and Liu, Mark H., Institutional Trading, Information Production, and the Choice Between Spin-Offs, Carve-Outs, and Tracking Stock Issues (July 2010). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=970649

Thomas J. Chemmanur

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/

Mark H. Liu (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

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