Do Tracking Stocks Reduce Informational Asymmetries? An Analysis of Liquidity and Adverse Selection

A firm's announcement that it intends to restructure based on tracking stock is usually associated with a positive and significant stock price reaction, at least in the short-run. Typically, this reaction has been attributed to expected reductions in a diversification discount, via reduced agency costs and/or reduced informational asymmetries. The existing literature has investigated this latter hypothesis - the impact of tracking stocks on informational asymmetries - by focusing on the behavior of equity analysts: the number following the specified firms and the accuracy of their forecasts. The results thus far have been inconclusive. In contrast, we focus on the behavior of market makers. In particular, we analyze the liquidity provided by market makers, as measured by the bid-ask spread, before and after a firm issues a tracking stock. Our results provide additional support to the growing evidence that restructurings based on tracking stocks are not effective at reducing informational asymmetries. Rather, firms that issue tracking stocks tend to exhibit less liquidity and greater adverse selection than a matched sample of control firms