Tracking Stock or Spin-Off? Determinants of Choice


  • I would like to thank A. Dittmar, T. Crack, H. Daouk, R. Rosen, S. Smart, W. Christie, L. Senbet, and J. Seward (the Editors), and the seminar participants at Indiana University, the 2001 Northern Finance Association (NFA) meeting, and the 2002 Financial Management Association meeting for their comments and suggestions. I also thank an anonymous referee for many insightful comments that have greatly improved this paper. I thank A. Dittmar for sharing her sample of spin-offs announced between 1983 and 1995. All errors are entirely my responsibility.


I examine the roles of valuable internal capital markets, cross-subsidization, and insider ownership as determinants of choice between tracking stock and spin-offs in corporate equity restructuring. I show that conglomerates are more likely to choose tracking stock if they want to obtain some of the benefits offered by a spin-off, without loosing the potential for valuable internal capital markets. My results suggest that the market rewards firms with valuable internal capital markets that opt for tracking stocks, and penalizes the possibility of consolidated tax treatments. The market also reacts more favorably to unanticipated tracking-stock announcements.