Inefficient internal capital market is often blamed for conglomerate diversification discount. While the positive market reaction to spin-off announcements is in conformity with that claim, the abnormal market return on tracking stock announcements is certainly not. This paper investigates the possibility of a bright side for internal capital markets in conglomerates that track business units as a mean of equity restructuring. This paper finds no evidence of a diversification discount for firms with a tracking stock. Partial support on the presence of diversification discount is found for a pair-matched sample of spin-off firms. This paper also finds evidence on more efficient internal capital markets for the sample of tracking-stock firms. The results may suggest that the conglomerates choice between tracking business units or spin-off of business units depends on the efficient allocation of internally generated funds.
Internal Capital Markets And Equity Restructuring