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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. 2005 The Southern Finance Association and the Southwestern Finance Association.

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Bibliographic Info

Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

Volume (Year): 28 (2005)
Issue (Month): 2 ()
Pages: 197-213

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Handle: RePEc:bla:jfnres:v:28:y:2005:i:2:p:197-213

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Cited by:
  1. 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, vol. 33(1), pages 27-42, January.

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