Mandatory Cash Distribution as One Stone for Two Birds: Curtailing the Agency Problem and Protecting Minority Shareholders

Master limited partnerships (MLPs) are publicly traded partnerships in the United States and are contractually obligated to distribute free cash flow to investors quarterly. Contrasting with the use of stock options in executive compensation by corporations, the general partner receives its compensation from distributed cash just like limited partners do. After controlling for the endogeneity problem and selection bias, we document that the MLPs have a similar Tobin’s q, a higher return on asset, similar cash flow ratio, and lower systematic and lower idiosyncratic risk than the corporations. However, there is evidence that the tunneling problem still exists in MLPs. As cash flow is more transparent and thus more difficult for manipulation than accounting earnings are, a reasonably well-designed mandatory cash payout policy may be a useful tool to protect minority shareholder by reducing the agency problems in corporations and curbing the abuses in executive compensation.