Institutional trading, information production, and the choice between spin-offs, carve-outs, and tracking stock issues

Thomas J. Chemmanur, Mark H. Liu

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

Abstract

We analyze a firm's choice between spin-offs, equity carve-outs, and tracking stock issues and the role of institutional investors in corporate restructuring. We model a firm with two divisions. Insiders have private information about firm value and face an equity market with retail and institutional investors. We show that restructuring increases information production by institutional investors (relative to that about the consolidated firm): the highest increase in information production arises from spin-offs, the next highest from carve-outs, and the lowest from tracking stock issues. Insiders with the most favorable private information implement spin-offs; those with less favorable private information implement carve-outs; those with even less favorable private information implement tracking stock issues; and those with unfavorable private information remain consolidated. We explain the positive announcement effect and increase in analyst coverage associated with all three forms of restructuring. Our model also generates a number of novel testable predictions for firms' choice between spin-offs, carve-outs, and tracking stock issues, and for institutional trading around these three forms of restructuring.

Original languageEnglish
Pages (from-to)62-82
Number of pages21
JournalJournal of Corporate Finance
Volume17
Issue number1
DOIs
StatePublished - Feb 2011

Keywords

  • Corporate spin-offs
  • Equity carve-outs
  • Information production
  • Institutional trading
  • Restructuring
  • Tracking stock issues

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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