The Effect of Organizational Tax Differences and Risk on Corporate and Limited Partnership Capital Structure

Abstract:     
Prior studies have shown that Limited Partnerships (LPs) use less debt than corporations and conclude this is due to tax induced corporate borrowing. We suggest these observed differences result from risk differences between LPs. LPs formed around natural resource assets use less debt than LPs formed around non-natural resource assets because uncertainty over future resource prices disproportionately increases the natural resource general partners' risk of loss in the event of LP bankruptcy. Our results support this explanation and show that differences observed in prior studies are due to the differential debt use between natural resource and non-natural resource LPs. Debt use by non-natural resource LPs is not significantly different from debt use by our corporate comparison groups. Our analysis provides an alternate explanation of corporate and LP capital structure differences which should be considered in future investigations of factors affecting capital structure decisions.

JEL Classification: G32, G33, K34, D23

working papers series