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Title:The influence of taxes and other factors on debt ratio differences between Master Limited Partnerships and corporations
Author(s):Terando, William David
Doctoral Committee Chair(s):Dietrich, J. Richard
Department / Program:Department of Accountancy
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Business Administration, Accounting
Abstract:This dissertation examines whether taxes and other factors influence debt ratio differences between corporations and Master Limited Partnerships. Four explanations are presented which predict that MLPs will have different debt ratios than IPOs. The first explanation predicts that the deductibility of interest expense provides IPOs with more incentive, relative to MLPs, to include debt in their financial structure. The second explanation predicts that MLPs will have lower debt ratios than IPOs because of the business risk differences between Investment and Operating MLPs and the organizational structure differences between limited partnerships and IPOs. The third explanation predicts that MLPs will have lower debt ratios than IPOs because MLPs are likely to have relatively higher levels of asset-based tax shields. This is because MLPs can write up their assets to fair market value when their units are sold in secondary markets (IRC S 754). The fourth alternative explanation suggests that MLPs formed by "high debt ratio" firms will have relatively higher debt ratios than other MLPs (or IPOs) because of: (a) the non-tax costs associated with significantly reducing debt obligations (including pre-payment penalties, (b) the advantages to the general partner of holding debt within an MLP.
This study shows that the deductibility of interest expense for tax purposes provides IPOs with more incentive than MLPs to include debt in their financial structure. However, it also suggests that MLPs have lower debt ratios than IPOs because Investment MLPs have lower debt ratios than Operating MLPs (and IPOs). This result is important because it suggests that previous studies may have overstated the importance of taxes in influencing debt ratio differences between MLPs and corporations by not also considering the distinction between Investment and Operating MLPs. As a result, policy makers who interpret MLP and corporate debt ratio differences as an indication of what would happen under an integrated tax system should evaluate these conclusions carefully.
Issue Date:1993
Rights Information:Copyright 1993 Terando, William David
Date Available in IDEALS:2011-05-07
Identifier in Online Catalog:AAI9329181
OCLC Identifier:(UMI)AAI9329181

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