The Reaction of Security Prices to Tracking Stock Announcements

This paper provides some empirical evidence on a relatively new and increasingly prevalent form of equity restructuring called tracking stock. Also known as quot;targetedquot; or quot;letteredquot; stock in the financial press, this equity structure has been adopted with increasing frequency, with seven tracking stocks being proposed in the first half of 1999 and several more rumored to be imminent. We find, for a sample of 27 firms, a mean abnormal return of over 3% in the two-day period surrounding the announced proposal to issue a tracking stock. Individually, 24 of the 27 firms in the sample earned positive abnormal returns, while none earned significantly negative abnormal returns. These estimates are comparable to previous estimates of abnormal returns associated with announcements of carve-outs and spin- offs. The empirical finding that announcements of all three forms of equity restructurings earn positive abnormal returns is consistent with the hypothesis that investors expect gains from more focused and transparent business units