The effect of shareholder-level taxes on organizational form and stock ownership
Utke, Steven William
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Although organizational form choice is a fundamental business decision, prior literature has not examined the role of heterogeneous shareholder-level taxes in this decision and in subsequent changes in investor stock ownership. I investigate the decision to form a master limited partnership (MLP), which is a tax-advantaged entity for some shareholders (tax-sensitive investors) and tax-disadvantaged for others (tax-exempt investors). I first extend existing organizational form literature by showing that, consistent with predictions, shareholder-level taxes influence organizational form choice – i.e., firms with higher levels of shareholders with a tax disadvantage from MLP ownership are less likely to subsequently carve-out MLPs. I next examine investor stock ownership changes after an organizational form change. Consistent with predictions, I find that tax-sensitive investors, on average, decrease their ownership in the parent and own a relatively larger share of the MLP than the parent after the carve-out. In contrast, tax-exempt investors own less of the MLP than the parent after the MLP carve-out. These results provide the first evidence that heterogeneous shareholder-level taxes affect organizational form decisions and that shareholder-level taxes are associated with fundamental changes in investor bases after changes in organizational form. More broadly, this study provides evidence that firms cater to investors in making organizational form decisions and that investors sort to firms based on firm tax characteristics inherent to organizational form.