The Value of Tunneling: Evidence from Master Limited Partnership Formations

Journal of Business Finance and Accounting. Available at: https://doi.org/10.1111/jbfa.12557, forthcoming.

49 Pages Posted: 21 Feb 2019 Last revised: 26 Jul 2021

See all articles by Aaron Mandell

Aaron Mandell

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 11, 2021

Abstract

Shareholders of publicly-traded subsidiaries are potentially susceptible to expropriation (tunneling) by parent companies (Atanasov, Boone, and Haushalter, 2010). Recent study suggests that this is particularly true among U.S. master limited partnerships (“MLPs”), where there is often substantial divergence between the control rights and cash-flow rights of parent firms, through their general partner interests (Atanassov and Mandell, 2018). Although the negative impact of tunneling on controlled firms is documented in the literature, little is known about the valuation consequences of tunneling for shareholders of parent corporations. Changes to the MLP agency environment over the prior two decades—namely, the allowance of modifications to fiduciary duty under Delaware law and the introduction of incentive distribution rights—have likely increased the incentive and opportunity for tunneling, and provide a rich setting for addressing this question. I examine the effects of changing tunneling incentives on stock returns of parent corporations announcing the formation of MLPs, and document significantly higher announcement period returns for MLP formations after these changes, amounting to roughly $188 million of additional value for shareholders of forming corporations, on average. Considered in concert with additional testing, this suggests that parent corporation shareholders benefit from the increased ability to tunnel MLP assets.

Keywords: Tunneling; Master Limited Partnerships; Equity Carve-Out; Agency Problems

JEL Classification: G30, G34, K22

Suggested Citation

Mandell, Aaron, The Value of Tunneling: Evidence from Master Limited Partnership Formations (May 11, 2021). Journal of Business Finance and Accounting. Available at: https://doi.org/10.1111/jbfa.12557, forthcoming., Available at SSRN: https://ssrn.com/abstract=3332770

Aaron Mandell (Contact Author)

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States

HOME PAGE: http://uwm.edu

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
11
Abstract Views
87
PlumX Metrics