In government we trust: rise and fall of Canadian business income trust conversions

摘要

Purpose - The purpose of this paper is to assess the market impact of announcements that publiclyrntraded limited liability firms would convert to business income trusts, and to test the robustness ofrnthe tax motive as the primary determinant of any conversion announcement effects by estimating thernmarket impact of the announcement by the Canadian Federal Government that the corporate incomernof Canadian income trusts would be taxed at the trust level.rnDesign/methodology/approach - Event-study methodology (including various tests of robustness)rnis used to examine the market impacts of the initial conversion announcement and the announcementrnthat the corporate income of Canadian income trusts would be taxed at the trust level. Cross-sectionalrnregressions are used to identify the determinants of the market effect associated with income trustrnconversion announcements.rnFindings - The paper finds that the market- and risk-adjusted abnormal returns (ARs) are positivernand very significant on the announcement dates and not significant on the conversion effective dates.rnThe price discovery process is not as smooth for the Canadian government's announcement after thernmarket close on Halloween day 2006, that it would tax income trusts at the trust level. While the ARsrnare negative and very significant on the first and second trading days after the announcement, muchrnof the second day ARs are reversed in the subsequent two days. Furthermore, negative andrnsignificant ARs precede the government announcement. The market impact of trust conversionrnannouncements is primarily related to the tax savings associated with such conversions and morernweakly related to potential agency problems associated with free cash flows.rnResearch limitations/implications - The research indicates the importance of any taxationrnchanges associated with changes in organization form on firm value. It also identifies the potentialrnfor informational leakage associated with government decisions.rnOriginality/value - The paper highlights the importance of taxes and tax changes and organizationrnform changes on firm valuation.