Post by Sapphire Capital on Aug 26, 2008 20:51:05 GMT 4
Income Trusts Governance and Performance: Time for a Post-Mortem
M. Martin Boyer
HEC Montreal - Department of Finance; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Montreal - HEC Montréal
Claude Francoeur
HEC Montreal
Real Labelle
HEC Montreal - Department of Accounting Studies
Stephane Rousseau
Université de Montréal - Faculty of Law
July, 14 2008
Abstract:
An income trust is an entity whose securities entitle the holder to the net cash flows generated by an underlying business or income-producing property owned by the trust or another entity. Income trusts are reportedly more tax efficient than common equity firms. Following what some observers referred to as a bubble or a "trust mania", on October 31st 2006, the Canadian government amended the income tax law to reduce the trusts' tax efficiency. This article holds a post-postmortem on that policy decision by comparing income trusts and common equity firms from a legal, governance and financial performance point of view.
In this article, we first stress that several authors expressed concerns about the level of investors' protection and governance quality offered by the income trust structure. These concerns were especially acute in the case of business trusts. We then test the hypothesis as to whether the industry, size and risk-adjusted returns of the various types of income trusts are greater than for corporations to compensate for those concerns. We find that income trusts other than energy trusts and to a lesser extent real estate trusts did not enjoy higher returns than corporations of similar industry, size and risk. These results partially support the recent policy decision by the Canadian government to remove this tax incentive favoring the income trust structure over the common equity's.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1159790
M. Martin Boyer
HEC Montreal - Department of Finance; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Montreal - HEC Montréal
Claude Francoeur
HEC Montreal
Real Labelle
HEC Montreal - Department of Accounting Studies
Stephane Rousseau
Université de Montréal - Faculty of Law
July, 14 2008
Abstract:
An income trust is an entity whose securities entitle the holder to the net cash flows generated by an underlying business or income-producing property owned by the trust or another entity. Income trusts are reportedly more tax efficient than common equity firms. Following what some observers referred to as a bubble or a "trust mania", on October 31st 2006, the Canadian government amended the income tax law to reduce the trusts' tax efficiency. This article holds a post-postmortem on that policy decision by comparing income trusts and common equity firms from a legal, governance and financial performance point of view.
In this article, we first stress that several authors expressed concerns about the level of investors' protection and governance quality offered by the income trust structure. These concerns were especially acute in the case of business trusts. We then test the hypothesis as to whether the industry, size and risk-adjusted returns of the various types of income trusts are greater than for corporations to compensate for those concerns. We find that income trusts other than energy trusts and to a lesser extent real estate trusts did not enjoy higher returns than corporations of similar industry, size and risk. These results partially support the recent policy decision by the Canadian government to remove this tax incentive favoring the income trust structure over the common equity's.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1159790