Organizational form choice and the valuation of oil and gas

The Tax Reform Act of 1986 reduced individual income tax rates below that of corporations. The fear that this would lead to systematic disincorporation has not apparently materialized since the major stock exchanges report that only about 100 partnerships were traded during the next 5 years. Scholes...

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Bibliographic Details
Published in:The Accounting review 1993-07, Vol.68 (3), p.657
Main Authors: Shaw, Wayne H, Wier, Heather A
Format: Article
Language:English
Subjects:
Corporate taxes
Dividends
Hierarchies
Master limited partnerships
Organizational structure
Petroleum industry
Statistical analysis
Tax rates
Valuation
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Summary:The Tax Reform Act of 1986 reduced individual income tax rates below that of corporations. The fear that this would lead to systematic disincorporation has not apparently materialized since the major stock exchanges report that only about 100 partnerships were traded during the next 5 years. Scholes and Wolfson (1992) suggest that this result is predictable because of the additional nontax costs of operating as a partnership. Guenther (1992) and Terando and Omer (1992) provide evidence that firms must have considered both tax and nontax costs when choosing organizational form. A study examines whether the factors taken into consideration in organizational form choice also affected the market value of a sample of firms in the oil and gas industry during the period 1985-1988. It is shown that master limited partnerships (MLP) invest significantly less in exploration for new deposits. The evidence suggests that MLPs may have been set up as limited-life entities to distribute assets to their unit holders in a tax-efficient manner.
ISSN:0001-4826
1558-7967