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DO TRACKING STOCKS REDUCE INFORMATION ASYMMETRIES? AN ANALYSIS OF LIQUIDITY AND ADVERSE SELECTION
Author(s) -
Elder John,
Jain Pankaj K.,
Kim JangChul
Publication year - 2005
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2005.00121.x
Subject(s) - adverse selection , market liquidity , information asymmetry , restructuring , diversification (marketing strategy) , monetary economics , stock (firearms) , economics , stock market , business , agency cost , financial economics , finance , corporate governance , shareholder , mechanical engineering , paleontology , horse , marketing , biology , engineering
A firm's announcement that it intends to restructure based on tracking stock is usually associated with a positive stock price reaction, at least in the short run. Typically, this reaction is attributed to expected reductions in a diversification discount, through reduced agency costs or information asymmetries. We reinvestigate this latter hypothesis by focusing on the liquidity provided by market makers before and after a firm issues a tracking stock. Our results suggest that such restructurings are not effective at reducing information asymmetries. Rather, firms that issue tracking stocks exhibit less liquidity and greater adverse selection than comparable control firms.