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Why Issue Tracking Stock? Insights From A Comparison With Spin‐Offs And Carve‐Outs

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  • Thomas J. Chemmanur
  • Imants Paeglis
Abstract
In recent years, tracking stocks, which amount to a new form of corporate restructuring, have been gaining in popularity. In 1999 alone, 17 companies announced new tracking stock issues, and by February 2000 there were 40 tracking stocks trading in the U.S. equity markets. Why have tracking stocks become so popular in recent years? In this article, the authors present new evidence on the effectiveness of tracking stock issues in creating shareholder value as compared to the record of two other closely related forms of corporate restructuring—spin‐offs and equity carve‐outs. The authors find that the 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 size to that of spin‐offs but greater than that of equity carve‐outs) on stock prices, and that the number of analysts following the firm increases following the issuance of tracking stock. These findings are interpreted as suggesting that the main corporate motives for issuing tracking stock are the valuation benefits from providing investors with more information about the newly listed subsidiary, while at the same time preserving the existing synergies between the business units involved. This maintenance of existing synergies, however, appears to have come at a significant price. Under the tracking stock structure, there seem to be no benefits attributable, as in the case of spin‐offs, to improvements in corporate governance. While spinoffs significantly increase the probability that the parents or subsidiaries will later be taken over (with its disciplining effect on management), there is no such increase in takeover probability for firms issuing tracking stock. Consistent with this difference, the authors find that the market‐adjusted two‐year holding period return for tracking stock parents and subsidiaries is significantly lower than the corresponding return for spinoffs and their corporate parents.

Suggested Citation

  • Thomas J. Chemmanur & Imants Paeglis, 2001. "Why Issue Tracking Stock? Insights From A Comparison With Spin‐Offs And Carve‐Outs," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(2), pages 102-114, June.
    • Handle: RePEc:bla:jacrfn:v:14:y:2001:i:2:p:102-114
    DOI: 10.1111/j.1745-6622.2001.tb00334.x
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    Cited by:

    1. Jie Cai & Yixin Liu & Yiming Qian & Miaomiao Yu, 2015. "Information Asymmetry and Corporate Governance," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 1-32, September.
    2. Armin Schwienbacher, 2008. "Innovation and Venture Capital Exits," Economic Journal, Royal Economic Society, vol. 118(533), pages 1888-1916, November.
    3. Benveniste, Lawrence M. & Fu, Huijing & Seguin, Paul J. & Yu, Xiaoyun, 2008. "On the anticipation of IPO underpricing: Evidence from equity carve-outs," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 614-629, December.
    4. Dereeper, Sebastien & Mashwani, Asad Iqbal, 2018. "Equity carve-outs, divergence of beliefs and analysts’ following," Research in International Business and Finance, Elsevier, vol. 43(C), pages 58-67.
    5. Klein, Christian & Schiereck, Dirk & Ton, Thai, 2018. "Die langfristige Wertentwicklung von Equity Carve-outs – Aktuelle empirische Evidenz für Westeuropa," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 72(3), pages 197-211.
    6. Chemmanur, Thomas J. & Liu, Mark H., 2011. "Institutional trading, information production, and the choice between spin-offs, carve-outs, and tracking stock issues," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 62-82, February.
    7. Wu, Kai & Lai, Seiwai, 2020. "Intangible intensity and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 64(C).
    8. Bardong, Florian & Bartram, Söhnke M. & Yadav, Pradeep K., 2006. "The Effect of Corporate Break-ups on Information Asymmetry: A Market Microstructure Analysis," MPRA Paper 13155, University Library of Munich, Germany, revised 26 Oct 2008.
    9. Vitkova, Valeriya & Tian, Siyang & Sudarsanam, Sudi, 2023. "Allocative efficiency of internal capital markets: Evidence from equity carve-outs by diversified firms," International Review of Financial Analysis, Elsevier, vol. 86(C).
    10. Dmitri Boreiko & Maurizio Murgia, 2013. "European spin-offs Origin, value creation, and long-term performance," BEMPS - Bozen Economics & Management Paper Series BEMPS05, Faculty of Economics and Management at the Free University of Bozen.

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