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Do Tracking Stocks Reduce Information Asymmetries? An Analysis Of Liquidity And Adverse Selection

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  • John Elder
  • Pankaj K. Jain
  • Jang‐Chul Kim

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.

Suggested Citation

  • John Elder & Pankaj K. Jain & Jang‐Chul Kim, 2005. "Do Tracking Stocks Reduce Information Asymmetries? An Analysis Of Liquidity And Adverse Selection," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(2), pages 197-213, June.
    • Handle: RePEc:bla:jfnres:v:28:y:2005:i:2:p:197-213
    DOI: 10.1111/j.1475-6803.2005.00121.x
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    References listed on IDEAS

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    1. Matthew J. Clayton & Yiming Qian, 2004. "Wealth Gains from Tracking Stocks: Long-Run Performance and Ex-Date Returns," Financial Management, Financial Management Association, vol. 33(3), Fall.
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    Cited by:

    1. Anna N. Danielova, 2008. "Tracking Stock or Spin‐Off? Determinants of Choice," Financial Management, Financial Management Association International, vol. 37(1), pages 125-139, March.
    2. Rudy De Winne & Christophe Majois, 2003. "A comparison of alternative spread décomposition models on Euronext Brussels," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 46(4), pages 91-136.
    3. Wei He & Tarun Mukherjee & Peihwang Wei, 2009. "Agency problems in tracking stock and minority carve-out decisions: Explaining the discrepancy in short- and long-term performances," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 33(1), pages 27-42, January.

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