DO TRACKING STOCKS REDUCE INFORMATION ASYMMETRIES? AN ANALYSIS OF LIQUIDITY AND ADVERSE SELECTION

John Elder (), Pankaj K. Jain and Jang-Chul Kim

Journal of Financial Research, 2005, vol. 28, issue 2, pages 197-213

Abstract: A firm's announcement that it intends to restructure based on tracking stock is usually associated with a positive stock price reaction, at least in the short run. Typically, this reaction is attributed to expected reductions in a diversification discount, through reduced agency costs or information asymmetries. We reinvestigate this latter hypothesis by focusing on the liquidity provided by market makers before and after a firm issues a tracking stock. Our results suggest that such restructurings are not effective at reducing information asymmetries. Rather, firms that issue tracking stocks exhibit less liquidity and greater adverse selection than comparable control firms. 2005 The Southern Finance Association and the Southwestern Finance Association.

Date: 2005

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