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Sources of Hidden Value and Risk Within Tracking Stock

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  • Joel T.Harper
  • Jeff Madura

Abstract

Tracking stock for a unit of a firm presumably allows the market to value and monitor that unit independently of the rest of the firm.Announcement of the creation of tracking stock elicits an abnormal share price response of 2.17%on average over a two-day period.The share price response at the time of the announcement is more favorable:when the voting rights of the tracking stock are based on a market valuation;when the parent company ’s debt ratio is relatively low;when the parent ’s previous stock performance is relatively poor; and when the parent is not engaging in an acquisition.These results are consistent with reduction of agency problems.At the same time,firms that create tracking stock do not experience higher long-term valuations,suggesting that agency problems are not resolved with the creation of tracking stock.

Suggested Citation

  • Joel T.Harper & Jeff Madura, 2002. "Sources of Hidden Value and Risk Within Tracking Stock," Financial Management, Financial Management Association, vol. 31(3), Fall.
    • Handle: RePEc:fma:fmanag:harper02
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    Cited by:

    1. Wei He & Tarun Mukherjee & Peihwang Wei, 2009. "Agency problems in tracking stock and minority carve-out decisions: Explaining the discrepancy in short- and long-term performances," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 33(1), pages 27-42, January.

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