Document Type

Working Paper

Publication Date



In this paper, we examine factors influencing the choice between tracking stocks and minority carve-outs and their performances. We expand the research in this field by incorporating a fa ctor that was largely ignored in extant literature: managerial entrenchment. We find that the following firms have a greater tendency to choose tracking stocks over carve-outs: firms with a tendency to increase executive pays--especially those in the form of subsidiary stocks, firms that are more tightly controlled by their executives, and firms with greater financial strength prior to restructuring. The former two are consistent with our conjecture that managerial entrenchment plays a role in the choice between tracking stocks and carve-outs. The latter result is consistent with our other hypothesis that prior financial strength influences the decision. Equally important findings are that both are characterized by poor long-term performances and that tracking stocks' performances are on average inferior to those of carve-outs. Evidence suggests that these sub-par performances can be partially attributable to managerial entrenchment.