Tracking Stock or Spin‐Off? Determinants of Choice

Danielova, Anna N.

doi:10.1111/j.1755-053x.2008.00003.x

“…This process reduced the final sample to 239 spin‐offs. This sample size is comparable to Danielova (2008), who identifies 164 spin‐offs from 1991 to 2002.…”

Section: Sample Selection and Descriptionmentioning

confidence: 94%

The Long‐Run Performance of Sponsored and Conventional Spin‐Offs

Klein

¹

,

Rosenfeld

²

2010

Financial Management

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Unlike a conventional spin-off, a sponsored spin-off takes place when the subsidiary to be divested sells an equity stake to an outside investor before going public, thereby receiving a substantial capital infusion. We find that the stock return performance of a sample of 57 sponsored spin-offs from 1994 through 2005 is significantly negative over a three-year period following the spin-off date. In contrast, 182 conventional spin-offs over same interval record an average return performance. The parent firms' stock performance for the year preceding (following) the spin-off date is below-average (average), suggesting that their earlier performance was adversely affected by the subsidiary and motivated the parent to spin it off. In support of this contention, we find that parent firms tended to under-invest in the subsidiary prior to the spin-off, due to the subsidiary's limited growth opportunities. This under-investment, in turn, could have motivated the subsidiary to seek outside funding sources before going public.

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“…This sample size is comparable to Danielova (2008), who identify 164 spin-offs between 1991 and 2002.…”

Section: Sample Selection and Descriptionmentioning

confidence: 75%

“…7 6 Barber and Lyon (1997) argue that the use of "reference portfolios" (i.e., a portfolio of matched firms) to calculate buy-and-hold abnormal returns can yield biased test statistics and argue that using a single matched firm (i.e., "control firm") eliminates these sources of bias. 7 Cusatis, Miles and Woolridge (1993) find that their spin-off sample's significantly positive return performance is driven entirely by the subsample of firms that were acquired by another party during the three-year, post-event period.…”

Section: Sample Selection and Descriptionmentioning

confidence: 99%

The Long-Run Performance of Sponsored and Conventional Spin-Offs

Klein

¹

,

Rosenfeld

²

2008

SSRN Journal

0

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Unlike a conventional spin-off, a sponsored spin-off takes place when the subsidiary to be divested sells an equity stake to an outside investor before going public, thereby receiving a substantial capital infusion. We find that the stock return performance of a sample of 57 sponsored spin-offs from 1994 through 2005 is significantly negative over a three-year period following the spin-off date. In contrast, 182 conventional spin-offs over same interval record an average return performance. The parent firms' stock performance for the year preceding (following) the spin-off date is below-average (average), suggesting that their earlier performance was adversely affected by the subsidiary and motivated the parent to spin it off. In support of this contention, we find that parent firms tended to under-invest in the subsidiary prior to the spin-off, due to the subsidiary's limited growth opportunities. This under-investment, in turn, could have motivated the subsidiary to seek outside funding sources before going public.

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“…Previous research has found the size of the firm's internal capital market explains the stock price reaction to the creation of tracking stock, 10 and that firms relying on internal capital markets for operational needs are more likely to choose a tracking stock structure rather than a spin-off. 11 Most previous studies documented a two to three percent abnormal return surrounding the announcement of tracking stock issuance indicating tracking stock was value-increasing at the time of creation, 12 as was the case with Pittston. However, other studies have found long-term equity underperformance after a tracking stock issue 13 and no improvement in operational performance.…”

Section: Dissolving Tracking Stockmentioning

confidence: 98%

Off Track: The Disappearance of Tracking Stocks

Davidson

¹

,

Harper

²

2014

J Applied Corp Finance

1

0

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During the two decades following the first announcement of a tracking stock issue by General Motors in 1984, over 50 new tracking stocks were created. The value of a tracking stock is supposed to reflect the performance of a division or operation of a firm, but does not have a direct claim on the division's assets or income. The voting rights of the tracking stock are only for the parent corporation, with no direct voting rights for the tracked division. The claimed benefits of issuing tracking stock include the use of internal capital markets, additional disclosure of the firm's operations, reduction of agency costs, the ability to directly compensate divisional management on performance, and greater analyst following and liquidity. But the last new issue of a tracking stock took place in 2001. And few, if any, tracking stocks still trade. This study examines how and why tracking stocks have largely stopped being issued, and why so many have been dissolved either through exchanges of shares, or sales or spin‐offs of the business units with tracking stock.

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Tracking Stock or Spin‐Off? Determinants of Choice

Cited by 8 publications

References 36 publications

The Long‐Run Performance of Sponsored and Conventional Spin‐Offs

The Long‐Run Performance of Sponsored and Conventional Spin‐Offs

The Long-Run Performance of Sponsored and Conventional Spin-Offs

Off Track: The Disappearance of Tracking Stocks

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