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The Long-Run Performance of Firms that Issue Tracking Stocks

In: Advances In Quantitative Analysis Of Finance And Accounting

Author

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  • Charmen Loh

    (Rider University, 2083 Lawrenceville Rd., Lawrenceville, NJ 08648, USA)

Abstract

This paper examines the stock market response to companies that issue tracking stocks. We find that the issuance of tracking stock is preceded by a period of significant underperformance. But the market seems to welcome the decision to issuance tracking stock, at least in the short run, as our results show that announcement is associated with a significant price increase. Postissuance, the issuing companies continue to underperform their industry peers, although the underperformance is smaller when compared to the preissuance period. An analysis of the operating performance reveals that tracking stock issuers are significantly less profitable, especially over the immediate 12 months prior to the issuance date. Furthermore, their earnings per share do not grow as fast as that of the control group. Finally, there is no evidence that tracking stock issuers are undervalued, contradicting comments made by some executives.

Suggested Citation

  • Charmen Loh, 2007. "The Long-Run Performance of Firms that Issue Tracking Stocks," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting, chapter 10, pages 199-213, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812772213_0010
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