Internal Capital Markets And Equity Restructuring

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Anwar Boumosleh
Abdallah Dah
Mustafa Dah


Diversification Discount, Spinoffs, Tracking Stocks, Internal Capital Markets


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.


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