The Role of Incentives and Governance in Master Limited Partnership Payout Policy

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Abstract

Using a sample of 85 Delaware master limited partnerships (“MLPs”), I examine the role of incentive distributions and governance provisions provided for in the operating agreements of MLPs in determining payout policy. Anecdotal evidence in the financial press and in the courtroom suggests that general partners may trade-off positive NPV investments in favor of cash distributions in order to take advantage of incentive distribution rights. I find evidence that despite these concerns, incentive provisions contracted for in the firms’ operating agreements are effective at mitigating agency costs of cash. I also find support for the substitution model of dividend policy, as set forth in La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000).

Author

• Aaron Mandell, University of Oregon