Equity Valuation of Modern Master Limited Partnerships
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Using a sample of 57 master limited partnerships (MLPs) formed from corporate assets between 1982 and 2011, I examine the share price effects on parent corporations from forming MLPs. Specifically, I compare announcement period returns during the first and second waves of MLP formations—1982-1987 and 1988-2011, respectively—to assess the effect of structural changes in the MLP agency and operating environments on the market response to MLP formation. I document significantly higher 3-day and 5-day announcement period returns for second wave MLP formations, suggesting that changes to the MLP agency and operating environments have enhanced the value impact of MLP formation. I also find evidence that parent corporations benefit from the increased opportunity to exploit conflicts of interest with the MLP, which arise from these changes. Finally, I examine the prediction of prior literature that MLP formation improves the parent company’s information environment, finding support for this assertion in the form of reduced idiosyncratic return volatility.