Why Firms Issue Targeted Stock

We analyze market reaction to targeted stock issuances and investigate possible motives for their use. We find a statistically significant abnormal return of 3.61% within a three-day window around the announcement of proposed targeted stock issuances, possibly attributable to greater information on targeted stock segments as well as monitoring and motivational advantages. We find lower tax-loss carry forwards among firms that issue targeted stock compared to those that spin off segments, suggesting that tax reasons motivate targeted stock use. The return and cash flows of targeted stocks are affected more by their common corporate affiliation, although industry influences remain strong.