Examining the Choice Between Tracking Stocks and Minority Carve-out and Their Relative Performances

In this paper, we examine factors influencing the choice between tracking stocks andminority carve-outs and their performances. We expand the research in this field byincorporating a fa ctor that was largely ignored in extant literature: managerial entrenchment.We find that the following firms have a greater tendency to choose tracking stocks overcarve-outs: firms with a tendency to increase executive pays--especially those in the form ofsubsidiary stocks, firms that are more tightly controlled by their executives, and firms withgreater financial strength prior to restructuring. The former two are consistent with ourconjecture that managerial entrenchment plays a role in the choice between tracking stocksand carve-outs. The latter result is consistent with our other hypothesis that prior financialstrength influences the decision. Equally important findings are that both are characterized bypoor long-term performances and that tracking stocks’ performances are on average inferiorto those of carve-outs. Evidence suggests that these sub-par performances can be partiallyattributable to managerial entrenchment.