JMGT_V2_N3_RP1 Ram B. Misra Journal on Management 2230 – 715X 2 3 16 28 Tracking stocks, Efficient market, Spin-offs, announcement A tracking stock, also known as targeted stock or letter stock, is issued as a new class of common stock that represents the financial performance of a specific division or subsidiary of the parent company. General Motors pioneered the use of tracking stock with its acquisition of Electronic Data Systems in 1984 and Hughes Electronics in 1985. Between 1984 and 1998, over forty tracking stocks have been issued or have been under consideration. Since 1998 not only many companies have not issued tracking stocks but many parent companies have also withdrawn most of what they issued in prior years. However, there is a renewed interest in using this tool. EMC announced an IPO plan in February, 2007 for one of its division, VMware. Prior studies have shown that public announcements of issuing tracking-stocks or spin-offs tend to increase the price of the parent company's stock by 2% to 3%. The study reported in this paper shows that there is an upward trend in excess returns starting 45 days before the announcement date and spiking on the announcement date. Over the period of 45 days preceding the announcement, the value of the portfolio goes up on average roughly by 5% over the market. There is almost a jump of 6% on the day of the announcement. Then, in the next 45 days after the announcement, most of the value is gone even though not all is lost - the portfolio still maintains approximately 2% gain over the market. However, as indicated by the hypothesis testing, the value is not statistically significant. This phenomenon - sustaining some value gain (2% for our portfolio) can be seen as an evidence of a value creation. December 2007 - February 2008 Copyright © 2008 i-manager publications. All rights reserved. i-manager Publications http://www.imanagerpublications.com/Article.aspx?ArticleId=334