Corporate governance and dividend policy: Evidence of tunneling from master limited partnerships

Corporate governance and dividend policy: Evidence of tunneling from master limited partnerships

Accepted Manuscript Corporate governance and dividend policy: Evidence of tunneling from master limited partnerships Julian Atanassov, Aaron J. Mande...

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Accepted Manuscript Corporate governance and dividend policy: Evidence of tunneling from master limited partnerships

Julian Atanassov, Aaron J. Mandell PII: DOI: Reference:

S0929-1199(17)30679-X doi:10.1016/j.jcorpfin.2018.10.004 CORFIN 1413

To appear in:

Journal of Corporate Finance

Received date: Revised date: Accepted date:

14 November 2017 4 October 2018 8 October 2018

Please cite this article as: Julian Atanassov, Aaron J. Mandell , Corporate governance and dividend policy: Evidence of tunneling from master limited partnerships. Corfin (2018), doi:10.1016/j.jcorpfin.2018.10.004

This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

ACCEPTED MANUSCRIPT We appreciate valuable comments from the editor, from the anonymous referee, from Joshua Cutler, Steven M atsunaga, Jake Thornock, and Brian Williams, and from workshop participants at the University of Oregon, the University of Wisconsin– M ilwaukee, and the American Accounting Association’s 2016 Annual M eeting. All errors and omissions are our own.

Corporate Governance and Dividend Policy: Evidence of Tunneling from Master Limited Partnerships

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[email protected]

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Julian Atanassova and Aaron J. Mandellb,*

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University of Nebraska-Lincoln, College of Business, Lincoln, NE 68588 University of Wisconsin-M ilwaukee, Lubar School of Business, M ilwaukee, WI 53211. *Correspondence to Aaron M andell, Sheldon B. Lubar School of Business; 3202 North M aryland Avenue; M ilwaukee, WI 53211, United States; phone (414) 229-6292; fax (414) 229-5999; .

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ABSTRACT

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Using a sample of 85 Delaware master limited partnerships (“MLPs”) from 2004 to 2016, we examine the relation between cash dividend policy and the strength of corporate governance measured by contractual governance provisions, such as fiduciary waiver, mandatory distributions, and voting rights, and by ownership structure. We find support for the tunneling model of dividend determination. Specifically, we document that firms with weaker governance pay out more cash dividends than better governed firms. We also find that, in the presence of low quality governance, these payments reduce firm value as well as the value of the firm’s cash holdings, suggesting that they are viewed by the market as a tunneling (extraction) of resources by the general partner at the expense of limited unitholders.

Keywords: Corporate Governance, Dividend Policy, Master Limited Partnerships, Tunneling

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1. Introduction

The distribution of free cash flow back to shareholders is widely believed to mitigate agency costs. Agency theory argues that in the presence of moral hazard or asymmetric information, outside investors prefer dividends to retained earnings, as the latter could be misappropriated by managers for their personal use or for empire building. Under the agency theory of dividends, the role of shareholder rights in compelling managers to distribute cash has been studied at length, with mixed results. La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000) (hereafter “LLSV (2000)”) set forth two models through

ACCEPTED MANUSCRIPT which they characterize the shareholder rights and dividend policy relationship. The first is the outcome model, in which shareholders leverage strong rights to compel managers to disgorge cash, thereby minimizing the agency costs associated with free cash flow. The second, the substitution model, establishes dividends as a substitute for shareholder rights. In the presence of strong governance and monitoring of managers, shareholders do not have the need for regular dividend payments as they have

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more confidence that the managers are acting in the shareholders’ interest. When governance is weak,

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however, managers must pay regular dividends to assure shareholders that they will not expropriate their investment.

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In addition to these two, well-established models, we propose extending a third—the tunneling model—to explain dividend determination. The tunneling model predicts that unitholders who have

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disproportionately more control rights than cash flow rights will extract, or “tunnel” the resources of the firm and the minority unitholders to their own benefit, in the form of higher dividend payments. This

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model predicts that dividend payments are higher when shareholder rights are weak, whereas stronger

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governance mechanisms allow shareholders to limit tunneling behavior. While this relation is similar to the substitution model in its directional prediction, it is possible to disentangle the two hypotheses.

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Specifically, the tunneling model predicts that paying dividends is value destroying for firms with weak

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governance (i.e., where tunneling is at work), while the substitution model predicts that paying dividends is beneficial for these firms (e.g., Officer, 2007).

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Johnson et al. (2000a) motivate the term “tunneling” and describe several cases in developed civil-law countries, while Johnson et al. (2000b) and Bertrand, Mehta, and Mullainathan (2002) provide empirical evidence in developing and emerging markets for tunneling within business groups and among firms with controlling shareholders via opportunistic transfer pricing, intercompany loans, and outright fraud or theft. We expand the existing framework to include the payment of dividends, leveraging the unique distribution structure of U.S. master limited partnerships. Master limited partnerships (“MLPs”) are limited partnerships or limited liability companies whose ownership units are traded publicly. MLPs are economically significant—having total market

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ACCEPTED MANUSCRIPT capitalization in excess of $400 billion, as of June 2017 1 —and present several advantages over traditional corporations when studying the interplay of firm-level investor protection and dividend policy. 2 First, because MLPs are partnerships, we can directly observe the contract between the general partner (“GP”) and individual investors through an examination of the partnership’s operating agreement (“OA”). For most partnerships these are private documents; but because MLPs are exchange-traded, their operating

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agreements are filed with the U.S. Securities and Exchange Commission, and are publicly available. Second, Delaware alternative entity law allows MLPs, and all other partnerships and limited liability

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companies (“LLCs”) established therein, wide flexibility in setting forth management’s responsibilities to

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its limited partners (“LPs”). That is, firms may contractually tailor, or even eliminate, the fiduciary duties of management in a way not possible under corporate law (Manesh, 2012). MLPs may also specify in

unenforceable or unlawful under corporate law.

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their contracts mandatory payouts of cash and limitations to unitholders’ voting rights which would be

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Third, because of the external governance structure of MLPs, where management is concentrated

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in a general partner over whom limited partners have inadequate oversight, ownership of LP units by the GP, or by its parent company, functions as a powerful and observable method to align the interests of

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ownership and management.3 Fourth, focusing on Delaware MLPs mitigates the effects of cross-country or cross-state differences, taxation effects, state of incorporation differences, and industry variation on

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dividend policy. 4 Finally, because the governance characteristics in this study are set forth at the outset of

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the partnerships’ operations, and are changed infrequently, the concern that governance quality and

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According to Alerian (2017) To enhance readability, we use the terms “dividends” and “dividend policy” throughout this study to describe M LP distributions; however, such distributions are not dividends in a technical sense, as dividends typically are paid by corporate entities, and are generally taxable to the recipient. 3 Tang and M ori (2017) study the role of sponsor (parent) ownership in Asian REITs, which have a similar management structure to that of M LPs. 4 M LPs are generally concentrated in the oil and gas industry, particularly after The Revenue Act of 1987, which is discussed in section 2. 2

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ACCEPTED MANUSCRIPT dividend payments are endogenously correlated is potentially reduced among MLPs when compared to traditional publicly traded firms.5 Using a sample of 85 Delaware MLPs, we assemble a dataset consisting of the governance provisions outlined in each firm’s operating agreement (as presented in Manesh, 2012, and reproduced in Appendix B), unit ownership data, distribution amounts, and relevant financial and stock market data.

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After analyzing these data, we find that dividend yield is increasing in the presence of weak governance

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provisions—particularly waivers of fiduciary duty—and decreasing in the level of general partner ownership. This result appears contrary to the outcome hypothesis, and supportive of the substitution

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hypothesis, as set forth by LLSV (2000). Because of the potentially unique agency environment of master limited partnerships, however, this negative relationship between governance quality and dividend yield

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could instead signal support for the tunneling model. We examine this possibility next. The external governance structure of MLPs, where the general partner exercises control over the

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partnership, with minimal oversight by the limited partners, makes them uniquely susceptible to conflicts

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of interest. Wolfson (1985) details the ability of general partners of oil and gas partnerships of the 1980’s—precursors to the modern MLP—to use partnership assets to advance their own interests. More

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recently, Tang and Mori (2017) examine the agency problems of externally managed REITs—entities

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with similar organizational structures to MLPs—noting that the REITs’ sponsors leverage their relationships with the REITs to extract rents through financing activities and through purchase and sale

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agreements. Among MLPs, conflicts of interest are addressed through special approval provisions, which grant special committees ultimate authority in approving transactions which may present a conflict between the interests of the GP and those of limited partners. These committees are typically appointed by the GP, leaving limited partners open to the misallocation of MLP assets by the general partner.

However, to the extent that expected dividend policy is established by the general partner upon the M LP’s formation, concurrently with the enshrinement of governance policies in the operating agreement, the threat of endogeneity may persist. We thank the referee for bringing this to our attention. 5

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ACCEPTED MANUSCRIPT Exacerbating these conflicts of interest are powerful cash distribution incentives available to the general partner in the form of incentive distribution rights, or “IDRs.” Incentive distribution rights encourage increases to distribution levels through an appeal to the GP’s self-interest (Goodgame, 2005). The incentive distribution, which Goodgame (2005) calls “the most powerful incentive for the general partner contained in the MLP partnership agreement,” sets forth a

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tiered distribution structure, whereby the GP receives an increasing proportional share of total cash

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distributed as distribution levels increase. In some cases, a general partner with incentive distribution rights may receive 50 percent of cash distributed despite holding only a 2 percent ownership interest in

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the MLP.6 Further, because these distribution tiers are determined by the amount of cash distributed rather than by GAAP or market-based performance measures, incentives exist for the general partner to increase

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distributions by using cash flows from financing activities, or by forgoing other investments. Incentive distributions, and their impact on MLP dividend levels, have recently come under fire

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from analysts, the media, and from limited partners of MLPs, with anecdotal evidence suggesting that

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GPs may defer maintenance of the MLP’s operating assets in favor of higher dividends. An analyst covering Kinder Morgan Energy Partners, L.P. (“KMP”), at the time the largest oil and gas MLP, recently

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accused the firm of “starving” its assets of needed maintenance in order to maximize distributable cash.7 Relatedly, a class action lawsuit was filed against Kinder Morgan in 2014 alleging that it has “allocate[d]

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cash flow for distributions in bad faith,” taking $3.2 billion since 2010 through its incentive distribution

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rights which the suit alleges was needed for maintenance of the firm’s pipeline assets.8 In 2013, Kinder Morgan GP, Inc., the general partner of KMP, held a 2.39 percent effective interest in KMP but received 43% of the cash distributed by KMP.9,10

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See Exhibit 2, for example Driver, A. 9/10/2013. “Upstart analyst says Kinder ‘starves’ assets for investors.” Reuters. 8 Slotoroff v. Kinder M organ Inc., CA9318, Delaware Chancery Court (Wilmington) 9 See Exhibit 2 10 Kinder M organ subsequently reorganized as a corporation. 7

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ACCEPTED MANUSCRIPT Faced with the choice of increasing dividends or investing in asset maintenance (or other longterm NPV-positive projects), GPs with short-term incentives could choose the option which maximizes their own wealth, without proper concern for the interest of limited partners. If the agency environment of MLPs is such that the GP benefits from making such a tradeoff, as the Kinder Morgan unitholder lawsuit alleges, the GP will commit the MLP’s cash flow to dividends to the extent permitted by the operating

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agreement and applicable law. In other words, the governance environment of the firm will restrict the

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extent to which the GP may tunnel the resources of the firm through self-serving distributions of cash flow. In this case, a negative relation between governance strength and dividend payout is not evidence of

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signaling by firms with weak governance (the substitution model), but instead suggests tunneling by the general partner in the absence of restrictive governance provisions (the tunneling model). In sum, the

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unique agency environment among MLPs creates uncertainty around the interpretation of a negative relation between governance and dividend yield, and therefore warrants additional testing to tease out the

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two hypotheses.

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To parse whether our findings support the substitution or tunneling hypothesis, we first perform cross-sectional tests in which we partition the sample by industry, GP ownership levels, public sponsors,

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and by the use of IDRs. We find evidence that in the industries most prone to conflicts of interest (i.e.

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upstream oil and gas MLPs), the MLPs’ dividend yield is higher, and the positive relation between fiduciary waiver and dividends is more pronounced. We also find that the positive relation between IDRs

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and dividend yield is moderated by GP ownership, suggesting that when the IDR is, in effect, shifting cash flow from GP-owned limited partner units to GP units, its association with yield is weakened. We further document that fiduciary waiver and IDRs are more positively associated with dividend yield when the MLP’s sponsor is not publicly traded, and is thus subject to less institutional and governmental oversight. Finally, when partitioning the sample by the use of IDRs, we find that the negative relation between governance quality, as measured by fiduciary waivers and low GP ownership, and dividends is generally more pronounced for MLPs with incentive distribution provisions. While not conclusive, these findings support the tunneling model.

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ACCEPTED MANUSCRIPT We next study the differential impact of dividend yield on two firm-level outcomes—firm value and the value of cash—for firms having high and low-quality governance. Overall, we find that paying more dividends is value destroying for firms with poor governance. Specifically, firms with waivers of fiduciary duty have lower firm value and lower-valued cash flows if they have above the median dividend payments compared to otherwise similar firms with a fiduciary waiver and below the median dividend

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payments. This suggests that market participants do not view dividends as a substitute for good

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governance among MLPs, but instead interpret high dividend payments as a tunneling of resources from the limited partners to the GP.

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We note that, in the case of MLP dividend payments discussed in this study, tunneling does not represent an illegal activity, and its existence is at least partially known to markets—as indicated by firm-

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value testing performed here, and by the findings of Mandell (2018). Considering the apparent awareness of tunneling among at least some MLP investors, the question of why limited partners continue to invest

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arises. A potential explanation is that limited partners of MLPs still enjoy comparatively high dividend

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yields, even if their share of distributable cash flow is disproportionately low compared to that of the general partner. More broadly, investment in MLPs may be driven by a general preference for high

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dividend yield among certain investors (Graham and Kumar, 2006), irrespective of their knowledge of the

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potential for tunneling by the general partner. Because of this, LPs could still perceive MLPs to be a superior investment vehicle for participating in the energy sector, viewing tunneling by the GP as an

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additional cost to doing business in that area. This study contributes to our understanding of the relationship between corporate governance and the distribution of cash flow by extending the tunneling hypothesis to the topic of dividend determination, and by presenting a unique setting in which strong, contract-based indicators of governance quality are observable. Complementing the previous literature, our paper documents that tunneling can happen in the U.S. as well, in the context of MLPs. Because master limited partnerships, by their nature as tax-favored organizations, tend to generate large, stable cash flows, the potential agency costs associated with free cash flow in MLPs are exacerbated, and the role of governance in mitigating these costs is magnified.

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ACCEPTED MANUSCRIPT This makes master limited partnerships a rich setting in which to examine the relationship between governance and dividend policy. Furthermore, understanding the dividend policy of MLPs in particular has become increasingly important in recent years, given the rapid growth of the MLP organizational form during the last decade—with total MLP market capitalization of over 400 billion dollars, as of June 2017.11 In addition,

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today’s MLPs are grappling with increased cost of capital as a constraint to continued growth (Hampton,

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2018), with many mature MLPs electing to reduce or eliminate IDRs as a means of easing the burden. Our finding that general partner ownership can mitigate the impact of IDRs on dividend yield informs the

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decision of whether to maintain an incentive distribution structure.12 Finally, by examining the impact of individual governance provisions on cash policy and firm value, this study also contributes to the ongoing

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academic debate on whether contractual bargaining can substitute for traditional fiduciary duty (e.g. Manesh, 2009, 2011, 2012; Horton, 2013).

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The remainder of this paper is organized as follows: Section 2 provides background and literature

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review and describes the nature of the agency problem in MLPs. Section 3 develops the hypotheses.

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Section 4 describes the empirical design. Section 5 presents the results, and Section 6 concludes. Background of Master Limited Partnerships and Theoretical Motivation

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2.1 Master Limited Partnerships

2.1.1 Background and tax treatment

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Master limited partnerships are limited partnerships, and more recently, limited liability companies, whose shares, or “units,” are traded publicly. MLPs typically have one general partner, organized as an LLC, which generally holds a two percent general partner interest in the MLP. This LLC is generally a special purpose vehicle, which is itself wholly owned by a “sponsor,” frequently a publiclytraded corporation. The management and board of directors, if applicable, of the MLP are usually 11

According to Alerian (2017) Examining the findings of this study regarding GP ownership and IDRs in the context of new-issue versus mature M LPs, which may require different growth incentives, could be a fruitful area for future study. 12

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ACCEPTED MANUSCRIPT appointed and employed by the general partner, with their responsibilities to the MLP outlined in the operating agreement, and in relevant state and federal law (Goodgame, 2005). An example of a typical MLP organizational structure is presented in Exhibit 1. The popularity of the master limited partnership as an organizational form has gone through ebbs and flows over the past three decades. The first MLP, Apache Petroleum, was formed in 1981, quickly

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followed by 107 more MLP formations, ranging from food retailers to chemicals and plastics companies,

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during the remainder of the 1980s (Ciccotello and Muscarella, 2001). The Revenue Act of 1987 dramatically slowed the ascension of the MLP structure by limiting the tax benefits of MLP treatment—

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described below—to firms with at least ninety percent of income coming from “exploration, development, mining or production, processing, refining, transporting…of any mineral or natural

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resource.” Indeed, according to Ciccotello and Muscarella (2001), only eleven MLPs were formed between 1990 and 1995. The recent expansion of oil and gas exploration and production in North

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America, however, has brought about resurgence in the MLP organizational form, with an increase in

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MLP market capitalization from $2 billion in 1994 to over 400 billion dollars in 2017.13 MLPs exist primarily as a result of their pass-through tax treatment. That is, income generated by

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the limited partnership is taxed at the partner level, while distributions from the partnership to its partners

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are non-taxable.14,15 As a result, and consistent with the argument of Jensen (1986), firms that generate high cash flow and have fewer investment opportunities benefit the most by organizing as an MLP, as

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their large cash distributions will be free from dividend taxation (Gentry (1994); Ciccotello and Muscarella (1997)). Тhe traditional, low-growth nature of MLPs, as described in Ciccotello and Muscarella (1997), has changed substantially since the 1990s when Kinder Morgan Energy Partners, LP

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According to Alerian and Wells Fargo Securities (2017) If distributions are sufficient to reduce the partner’s tax basis below zero, any excess constitutes a “distribution in excess of basis,” which may be taxable to the partner at the applicable capital gains tax rate. 15 See Collins and Bey (1986),Guenther (1992), and Gentry (1994) for additional discussion of the potential tax benefits of the M LP form. 14

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ACCEPTED MANUSCRIPT set an example of rapid and sustained MLP growth through acquisitions (Creswell, 2003; Kendall and Rogers, 2017).16 2.1.2 Governance There are several corporate governance mechanisms that can be used to remedy agency problems. The ability of limited partners (principals) to monitor and to hold accountable the general partner (agent)

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limits the extent to which the GP may expropriate their investment. As noted earlier, the relationship

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between the general partner and the limited partners is governed by the MLP’s operating agreement, subject to applicable state and federal law. State law—particularly alternative entity law in Delaware,

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where the vast majority of MLPs are formed17 —has traditionally supported contractual freedom in the governance of partnerships. That is, MLPs may specify in their contracts mandatory pay-outs of cash,

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limitations to unitholders’ voting rights, provisions for manager removal, and restrictions on the duration and scope of operations, to name a few. This is in stark contrast to the generally vague common law

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requirement of “fiduciary duty” to which Delaware corporations are held. Further, certain rights of

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corporate shareholders are simply not open to contractual modification under Delaware corporate law, such as the right of shareholders to vote annually to elect members of the board. The most severe example

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of this is the recent allowance of alternative entities formed under Delaware law to contractually restrict,

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or even eliminate, the fiduciary duties of their managers. 18 This dramatic departure from corporate governance tradition is intended to allow alternative entities the freedom to contract over the

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responsibilities of management, and to replace fiduciary responsibility with so-called “uncorporate substitutes,” such as the mandatory distributions and restrictions of scope described above.19

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We thank the referee for pointing this out. That we limit our sample to M LPs formed in Delaware, an organizational choice made by those forming the M LP, is a limitation of this study. However, because we are examining governance provisions of Delaware M LPs, and are including the universe of such firms during our sample period, we do not believe selection bias to be an issue. 18 See Delaware Laws 589-91, 612-14 (2004) 19 The NYSE Listed Company Manual accommodates these, and other, M LP provisions by exempting limited partnerships from certain exchange listing requirements to which corporations are subject, including independent director requirements (§303A.00) and unitholder approval of new share issuances (§312.03(e)). Non-voting units are generally allowed under §313.00(B). §303A.10 recommends that OAs prohibit conflicts of interest, but does not require it. See Ribstein (2009) and Horton (2013) for additional discussion. 17

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ACCEPTED MANUSCRIPT The unique governance climate of Delaware alternative entities has attracted the attention of legal scholars for some time. Whether governance provisions, such as those for mandatory distributions and for fixed operating lives of partnerships, are sufficient to counter-balance waiver of, or exculpation from, fiduciary duty, is an ongoing matter of debate in the legal literature. Goodgame (2005, 2012) provides an overview of the governance environment of MLPs, detailing changes in their organizational structures

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over time. Manesh (2012) and Horton (2013) present the first empirical studies of the use of fiduciary

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waivers and uncorporate substitutes. Both authors comb the operating agreements of Delaware MLPs, cataloguing the governance provisions of each. Manesh (2012) finds that firms do not appear to

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sufficiently offset their waivers of fiduciary duty with substitutes such as fixed firm lives, limited partner voting rights, or mandatory distributions. Horton (2013) shows that the vast majority of MLPs employ

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“special approval” provisions with respect to conflicts of interest, whereby the limited partners are deemed to assent to the actions of the GP as long as those actions are approved by a special committee,

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which is frequently appointed by the GP itself.

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Ciccotello and Muscarella (2001) present, to our knowledge, the first and only study of the impact of MLP contracts—that is, operating agreements—on future firm performance. They examine ten

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contractual provisions affecting firm financial policies and rights of management, finding that restrictions

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on the scope of partnership operations and the requirement that limited partners approve the withdrawal of management are positively associated with future operating performance. The authors also compare the

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prevalence of these ten provisions across time and across levels of general partner and blockholder ownership. They find that MLPs with operating agreements that are generally unfavorable, in terms of the protection of minority interests, have higher levels of insider ownership, supporting ownership as a substitute for contracting. They do not, however, provide empirical testing of this latter finding beyond noting this tendency. Specifically, they do not provide empirical evidence that high insider ownership is able to mitigate any negative performance effects of weak investor protection in the operating agreement. As Ciccotello and Muscarella (2001) predates Delaware’s allowance of fiduciary waiver, perhaps the

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ACCEPTED MANUSCRIPT most significant element of Delaware alternative entity governance, such provisions are also absent from their analysis. This paper is the first, to our knowledge, to directly examine the relationship among the contractual governance provisions of MLPs—specifically fiduciary waiver, voting rights, and mandatory distributions—and dividend policy. We shed light on the governance-dividend relationship, on the nature

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of contracting between the general partner and limited partners of MLPs, and on their joint impact on firm

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value. 2.2 Agency Theory and Dividend Policy

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Jensen (1986) theorizes that dividend policy is determined by agency costs arising from the separation of ownership and control. Disbursements of cash to shareholders reduce the manager’s ability

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to spend firm assets on perquisites, and also increase the likelihood that the manager will face the

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discipline of capital markets. This agency theory approach to dividend determination has received continuing support in the literature over traditional signaling and clientele theories (Denis and Osobov,

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2008; for discussion of signaling and clientele theories, see the survey by Allen and Michaely, 2003).

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Through this agency framework, shareholder rights at both the institutional and firm levels have been shown to influence corporate dividend policy. LLSV (2000) set forth two competing models of this

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influence. The first is the outcome model, in which shareholders leverage strong rights to compel managers to disgorge cash, thereby minimizing the agency costs associated with free cash flow. The

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second, the substitution model, establishes dividends as a substitute for shareholder rights. Because firms must periodically return to capital markets to raise funds, they must establish a reputation for not misappropriating funds, and do so through the regular payment of dividends. LLSV (2000) find support for the outcome model, which is echoed by the majority of subsequent studies in this area. Adjaoud and Ben-Amar (2010) find a positive relationship between governance quality, particularly board composition, and dividend yield among Canadian firms. Using governance data from Institutional Shareholder Services (“ISS”), Jiraporn, Kim, and Kim (2011) show that firms with

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ACCEPTED MANUSCRIPT high ISS governance ratings are more likely to pay dividends and pay larger dividends, generally. In a study of creditor rights, Byrne and O’Connor (2012) find support for the outcome model, especially in countries with strong creditor rights. In a sample of firms in emerging markets, Mitton (2004) finds that firms with stronger governance have higher payouts. Bartram, Brown, How, and Verhoeven (2008) study the interrelation between country-level and firm-level shareholder protection, finding that firm-level

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corporate governance quality is positively related to payout, particularly when country-level protection is

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weak.

However, several other studies find support for the substitution model. Hu and Kumar (2004) find

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that both the likelihood and level of dividend payouts are positively related to measures of managerial entrenchment. John and Knyazeva (2006) show that firms with higher quality governance have lower

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dividend payouts, instead preferring the flexibility of share repurchases. They describe the precommitment to pay dividends as a substitute for good governance. Using a sample of firms predicted to

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pay dividends, Officer (2007) finds that predicted payers with high governance quality are less likely to

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pay dividends than are firms with low quality governance. Officer (2007) also provides evidence that the shareholder response to dividend initiations is more positive for weak governance firms, consistent with

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the hypothesis that investors view dividends as a governance substitute.

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In this paper we extend existing theory on “tunneling” to complement the previous dividend policy literature and to explain the unique agency problem in MLPs. As Johnson et al. (2000a) explain, the term

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was first coined in the 1990s in the Czech Republic where the cash and assets of large companies were removed out of the firm (as if through an underground tunnel) to the benefit of the managers and controlling shareholders. The authors argue that tunneling is directly related to the duty of loyalty (fiduciary duty), whereby controlling shareholders, managers and directors are directly accountable to the minority shareholders if there is a conflict of interest and they benefit at the expense of the minority shareholders. The duty of loyalty is not as prevalent in other countries as it is in the U.S. and therefore, tunneling is more widespread.

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ACCEPTED MANUSCRIPT Master Limited Partnerships provide an excellent context to study possible tunneling. First, there is a significant divergence of control rights and cash flow rights. A GP with a 2-5% stake in the MLP can have virtually 100% control over the MLP. Second, unlike the usual corporate form in the U.S., in MLPs the GPs can waive the fiduciary duty altogether. Since this duty is at the core of enabling tunneling (Johnson et al. (2000a)), we expect that MLPs that waive fiduciary duty will be more susceptible to

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tunneling. Third, MLPs provide a novel method in which tunneling might manifest – through paying

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dividends. Previous empirical research has focused on other types of tunneling – transfer pricing, pyramidal structures, interfirm loans, and outright theft. Johnson et al. (2000b) argues that tunneling is an

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important reason that countries with civil law systems suffered more from the 1997-1998 Asian financial crisis. Bertrand et al. (2002) document widespread tunneling in India, occurring through pyramidal

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structures through non-operating components of cash and profit.

Extant literature appears to make clear that agency concerns are a meaningful determinant of

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dividend policy. Whether dividend payments arise because the interests of management and shareholders

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are closely aligned through other means, or as a result of the failure of other governance mechanisms to adequately minimize agency problems, remains an open question on which this study sheds light.

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Furthermore, this study provides evidence that even in a developed economy such as the U.S., dividends

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can be used by controlling shareholders as a means to enrich themselves at the expense of minority shareholders. The MLP setting provides the opportunity to examine, in the U.S., a case of a divergence in

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control rights and shareholder rights—an issue that has been examined primarily in emerging economies. 2.3 The Agency Problem in Master Limited Partnerships The setting of master limited partnerships provides valuable insight into the relationship between governance and dividend policy. However, it is important to consider ways in which the agency problem of MLPs may differ from that of traditional corporate entities. Contemplating an agency environment as described by Easterbrook (1984) and Jensen (1986), and the tax-favored status of partnership distributions, the parties to the formation of a master limited partnership contract for powerful cash

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ACCEPTED MANUSCRIPT distribution incentives within the firm’s operating agreement. Chief among these is the incentive distribution (also incentive distribution rights or “IDR”), which provides for the allocation of an increasing proportion of distributed cash flow to the general partner as the level of the distribution increases. That these incentive tiers are based on the amount of cash distributed, or deemed available for distribution, and not on GAAP-based performance or stock market-based performance, is an important

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distinction. As a result, the general partner could increase its incentive distribution at its own discretion,

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using non-operating cash flows such as proceeds from asset sales or issuances of equity and debt.20 MLPs often reveal the ability of general partners to authorize distributions for their own benefit.

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Blueknight Energy Partners, L.P., in its 2012 Form 10-K, is strikingly forthcoming about the possibility that its GP might inflate distributions against the interests of the limited partners in order to maximize its

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incentive distribution:

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“…if we do not have sufficient available cash from operating surplus, our General Partner could cause us to use cash from non-operating sources, such as asset sales, issuances of securities and borrowings, to pay distributions, which means that we could make distributions that deteriorate our capital base and that our General Partner could receive distributions on its incentive distribution rights to which it would not otherwise be entitled if we did not have sufficient available cash from operating surplus to make such distributions;…”

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Such activity could be an attractive proposition for the GP, as the incentive distribution construct

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virtually ensures that its share of distributions will exceed its effective ownership interest in the MLP.21 The potential adverse effects of the incentive distribution structure are magnified by the conflicts of

AC

interest between the GP and the limited unitholders of the MLP. Wolfson (1985) describes the unique susceptibility of oil and gas partnerships of the early 1980’s—precursors to the modern MLP—to conflicts of interests, specifically relating to the ability of the general partner to use partnership assets to “prove-up” properties held on its own account and to pursue suboptimal drilling strategies for its own benefit. Conflicts of interest are not unique to MLPs, but the 20

SEC Regulation G does require a reconciliation of non-GAAP performance measures, such as distributable cash flow, to their most closely related GAAP performance measure when such non-GAAP measures are included in annual or quarterly reports. 21 For example, KM I, the sole shareholder of Kinder M organ Energy Partners, L.P.’s (KM P) general partner, received a 49% share of KM P’s distribution through its ownership of the 2% GP interest and 9.8% LP interest. See Exhibit 2.

14

ACCEPTED MANUSCRIPT mechanism through which these conflicts are resolved in MLPs is. Special approval provisions in the operating agreements of substantially all MLPs insulate the GP from unitholder lawsuits regarding conflicts of interest. Essentially, these provisions state that any course of action by the GP with respect to a conflict of interest shall be deemed approved by all members of the MLP if such action is approved by a special committee (Horton, 2013). This committee is typically appointed by the GP. Because actions

IP

T

taken by the GP in the presence of conflicts of interest could be approved trivially by special committee,

CR

the limited partners of MLPs are uniquely susceptible to the misallocation of firm assets by the GP. In equilibrium, if management has an incentive, through conflicts of interest, incentive

US

distributions, or otherwise, to over-distribute the firm’s cash flow, the initial contracting parties to the MLP should be aware of this and adjust the contract accordingly to minimize such agency problems.

AN

However, there is reason to believe that limited partners may not be fully aware of the potential agency problems associated with incentive provisions in the MLP operating agreement. First, Wolfson (1985)

M

shows that industry experts in the oil and gas sector fundamentally misunderstood the incentives provided

ED

to GPs by the various revenue sharing agreements used by oil and gas partnerships. Though we cannot speak directly to the evolution of understanding of MLP operating agreements, or lack thereof, since

PT

Wolfson (1985), this suggests that at least some elements of OAs may not be fully understood by

CE

outsiders. Second, MLPs are largely held by retail investors22 , who may be, on average, less sophisticated than their institutional counterparts, or at least less attentive to the nuance of MLP operating agreements.

AC

Whether the GP, as a result of its incentive distribution rights and/or of conflicts of interest, will forego positive NPV investments in the partnership in favor of increasing dividend levels depends first on the relative benefit of doing so—the difference between the GP’s ownership interest and its cash flow rights—and second on its ability to do so under the constraints of the operating agreement and applicable law. By examining the relationship between the firm’s governance provisions (described in the previous section) and its dividend policy, this study presents a joint test of the agency approach to dividend

22

During our sample period, institutional owners hold an average of 28.7% of units outstanding (see Table 2).

15

ACCEPTED MANUSCRIPT determination and the ability of the distribution incentives provided for in the MLP operating agreement to minimize agency costs. 3.

Hypothesis Development We begin our study of governance and dividend policy, and of the competing models set forth by

T

LLSV (2000) and by the present study, by first determining the direction of the relationship. Extant

IP

research on corporate governance and dividend policy, as described in Section 2, is mixed in its

CR

predictions. Given these disparate findings, we set forth the following hypotheses: H1a: Governance quality is positively related to dividend yield.

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H1b: Governance quality is negatively related to dividend yield.

AN

A finding in support of H1a would signal support for the outcome model, where firms with stronger governance choose to reduce the agency costs of cash through the payment of higher dividends.

M

However, as described in previous sections, finding support for H1b is less clear in its interpretation. In

ED

the traditional case of Easterbrook (1984) and Jensen (1986), a negative relation between governance and dividend yield lends support to the substitution model, where managers (or the GP) signal stewardship

PT

through a commitment to the payment of dividends. However, considering the external management structure of MLPs, and the uniquely powerful distribution incentives provided to the general partner, it is

CE

possible that GPs may extract rents through the over-distribution of cash flows, which accrue disproportionately to themselves. If this is so, a finding in favor of H1b could support a third model of

AC

dividend determination—the tunneling theory. In this model, controlling shareholders and managers will “tunnel-in” or extract the resources of the firm to their own personal benefit (e.g. Johnson et al., 2002). This usually occurs when there is substantial divergence between the cash flow rights and the control rights of controlling unitholders, as documented in developing economies by La Porta et al. (1999) and La Porta et al. (1998, 2002), among others. In the case of the MLPs, the agency problem is between the GPs and LPs, where the GP has a disproportionate claim to control the distribution rights, even if their ownership stake is small. In that case, the GP is effectively tunneling resources (e.g. Johnson et al.

16

ACCEPTED MANUSCRIPT (2000a), Bertrand, Mehta and Mullainathan (2002)) from the firm into their own pockets. If the cash stays in the firm and is invested in positive NPV projects, the GP will have a small claim on the profits depending on the ownership. On the other hand, if the GP extracts the cash immediately, they can claim 100% of the cash, which in many cases can be more lucrative.

T

In order to address this ambiguity, conditional upon finding support for H1b, we examine two

IP

firm-level outcomes which we expect are influenced by governance quality and dividend policy—firm

CR

value and the value of cash (Tang and Mori, 2017; Dittmar and Mahrt-Smith, 2007). We set forth competing hypotheses to allow for the possibility that a negative relation between governance quality and

US

dividend yield could signal support for either the substitution or tunneling models:

AN

H2a: Conditional upon finding a negative relationship in tests of H1, for low governance firms, high dividend yield is positively related to firm value and the value of cash. (Substitution model)

ED

M

H2b: Conditional upon finding a negative relationship in tests of H1, for low governance firms, high dividend yield is negatively related to firm value and the value of cash. (Tunneling model) Finding support for H2a would signal that the traditional agency costs models of Easterbrook

PT

(1984) and Jensen (1986)—where the disbursement of free cash reduces agency costs—hold in the case of MLPs. Findings in support of H2b would suggest the opposite, that the incentives and governance

CE

provisions set forth in the operating agreements of MLPs create benefits to the GP from the overdistribution (tunneling) of cash. That is, if the tunneling model holds, the cash flow benefits to the GP

AC

from over-distribution outweigh any negative firm value consequences, which are disproportionately small to the GP in comparison to its cash flow rights. 4. Sample Selection and Empirical Design 4.1. Sample Selection Because MLPs are governed by the terms of their operating agreements, any study of governance provisions among MLPs requires a careful reading and understanding of those agreements. Manesh (2012) examines the operating agreements of every publicly traded Delaware LP and LLC in existence as

17

ACCEPTED MANUSCRIPT of June 2011—of which there are 85—cataloging provisions relevant to each firm’s governance structure, including fiduciary waiver and exculpation provisions, provisions employing uncorporate substitutes, and unitholders’ right to elect the firm’s directors. This snapshot of the universe of MLPs as of June 2011 forms the basis for this study’s sample. Although we do rely on the analysis of governance provisions in Manesh (2012), we nevertheless perform our own examination of sample firms’ annual reports and

IP

T

operating agreements for all years within the sample period to determine whether any changes to these provisions take place during our period of study. This examination reveals five instances of a change in a

CR

governance provision of interest.23 After obtaining governance data from Manesh (2012), we collect the

US

remaining data for the 85 sample firms, selecting a sample period beginning January 1, 2004 and ending December 31, 2016. We choose this window as a result of the surge in use of the MLP organizational

AN

form during the mid-2000’s—extending the sample period into earlier years would create a more uneven panel.

M

Most MLPs do not have annual unitholder meetings and do not file proxy statements. As a result,

ED

compensation data is not readily available through traditional datasets. Instead, we manually search Forms 10-K for details of managers’ remuneration and for the details of their compensation agreements

PT

with the firm, further consulting operating agreements, as necessary. Because most management teams are not employed by the MLP, but rather are employees of the general partner (which is not generally

CE

publicly traded), there is some inconsistency in the reporting of compensation on the firms’ annual

AC

reports. As a result, some firms in the sample report no compensation data for their executives, while others receive small allocations of compensation expense from the general partner, based on an estimate of the executives’ time spent on the affairs of the MLP.24 With this in mind, we restrict our use of

23

Plains All American Pipeline, LP revoked its waiver of fiduciary duty in its Amended and Restated Partnership Agreement dated 12/23/2010. BreitBurn Energy Partners, LP and Eagle Rock Energy Partners, LP granted their unitholders the right to elect their respective GPs’ boards of directors beginning in 2010; M arkWest Energy Partners, LP granted their unitholders voting rights in 2008; and Penn Virginia Resource Partners, LP did the same during 2011. 24 For example, TransM ontaigne Partners, LP states the following in the compensation discussion and analysis section of its 2012 10-K: “We do not directly employ any of the persons responsible for managing our business. We are managed by our general partner, TransM ontaigne GP L.L.C. The executive officers of our general partner are employees of and paid by TransM ontaigne Services Inc. We do not incur any direct compensation charge for the executive officers of our general partner. Instead, under the

18

ACCEPTED MANUSCRIPT compensation data to option compensation as a proportion of total compensation, which prior literature (e.g. Cuny et al, 2009), has linked to dividend policy. These data are used in some of the empirical tests that follow, but the reader should interpret these results cautiously. CEO and general partner ownership data are also hand-collected from Forms 10-K and DEF-14A, as applicable. Financial and stock price data are obtained from Compustat and the Center for Research in Security Prices (CRSP) database,

IP

T

respectively, and institutional ownership data is obtained from Thompson Reuters. Table 2 presents

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descriptive information on major firm, compensation, and ownership-based characteristics of the sample. 4.2. Empirical design

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4.2.1 Contracutal provisions

Prior studies of governance and dividend policy have modeled governance using aggregate

AN

measures, such as the G Index of Gompers, Ishii, and Metrick (2003) or Institutional Shareholder Services (ISS) metrics. We do not use an aggregated measure for three reasons. First, many of the anti-takeover

M

provisions included in the G Index are either not relevant to MLPs (management is compensated by the

ED

general partner, and board members are appointed by the general partner, so compensation and board of directors related governance measures may not apply) or are universal to MLPs (such as poison pills).

PT

Second, because this study is the first to examine each of these relatively new governance elements—

CE

fiduciary waiver has only been possible in Delaware partnerships since 2004—there is value in studying each provision independently. Finally, we wish to make inferences about the ability of provisions such as

AC

voting rights and mandatory distributions to substitute for fiduciary responsibility, which would not be possible with an aggregate measure. Instead, we use the data gathered by Manesh (2012) on three prominent governance provisions found in MLP operating agreements: fiduciary waiver, mandatory distributions, and the right to elect the board of directors. Manesh (2012) defines fiduciary waiver provisions as those which absolve the GP omnibus agreement we pay TransMontaigne Inc. a yearly administrative fee that is intended to compensate TransM ontaigne Inc. for providing certain corporate staff and support services to us, including services provided to us by the executive officers of our general partner. During the year ended December 31, 2012, we paid TransM ontaigne Inc. an administrative fee of approximately $10.8 million.”

19

ACCEPTED MANUSCRIPT from fiduciary duty altogether, and do not simply modify or displace certain aspects of fiduciary responsibility. We follow this distinction. Mandatory distribution provisions mandate that the partnership make quarterly distributions of substantially all free cash flow generated during that period. Although MLPs usually have a “board of directors,” those directors are generally directors of the general partner and are appointed by the GP’s sponsor, not elected by the limited partners (Goodgame, 2005). This is

IP

T

partially by design, to concentrate control of the MLP in the GP, but is also a product of legal tradition, as

CR

the limited liability of limited partners could historically be compromised by participation in the management of the firm. In the context of this study, and consistent with Manesh (2012), firms are

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deemed to grant voting rights to the limited partners if the limited partners are able to elect at least a majority of the GP’s board members.

AN

When assessing governance quality, we interpret the presence of a fiduciary waiver as an unambiguous sign of weaker corporate governance. Conversely, we expect that the granting of voting

M

rights to limited partners is a signal of higher quality governance, given the strengthened monitoring role

ED

such rights convey to the owners of limited partnership units. The characterization of mandatory distribution provisions is somewhat less clear. On one hand, the commitment to distribute all free cash to

PT

unitholders is traditionally interpreted as reducing the agency costs associated with cash holdings. On the

CE

other hand, should MLPs’ distribution incentives go too far, such that GPs excessively benefit from the over-distribution of cash, mandatory distribution provisions may signal higher agency costs. It should also

AC

be noted that, despite the “mandatory” nature of these provisions, managers continue to have discretion over the level of distributions. This is because cash “available for distribution” (also, distributable cash flow, or “DCF”) is computed net of reserves for operations and for maintenance capital, which are set by management. The retention of cash for these basic expenditures may mitigate some of the overdistribution concerns outlined in this study. However, because DCF is a non-GAAP disclosure, its computation may not receive the same audit scrutiny that income statement or statement of cash flow items command, and maintenance capital could be underestimated (understated) by management in order

20

ACCEPTED MANUSCRIPT to support higher distribution levels. 25 Given that mandatory distribution provisions may be interpreted as either reducing or exacerbating agency costs, and considering the significant managerial discretion over the distributable cash calculation, we do not consider such provisions as uniformly positive or negative indicators of governance quality. Instead, we consider the implications of mandatory distributions in each of our tests individually.

IP

T

Table 1 presents a summary of the frequency with which these governance provisions appear in

CR

the operating agreements of the sample firms. The vast majority of firms take advantage of their ability under Delaware alternative entity law to free themselves from at least some fiduciary responsibility.

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Specifically, 49 percent of firms provide for a full waiver of fiduciary duty, with an additional 39 percent of firms including exculpatory provisions of some type in their operating agreements (untabulated).

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Roughly 26 percent of firms grant limited partners the right to elect at least a majority of directors. Not surprisingly, given the yield-based nature of MLP investment, 81 percent of MLPs mandate the

M

distribution of free cash flows to their partners.

ED

Manesh (2012) also catalogues data on the use of fiduciary exculpation clauses and the establishment of perpetual operating lives, though these are excluded from this study. Also excluded from

PT

our analyses are restrictions of scope and general partner withdrawal provisions, which Ciccotello and

CE

Muscarella (2001) find to be positively associated with firm performance. Fiduciary exculpations, perpetual operating lives, and GP withdrawal provisions are not considered as a result of their ubiquity

AC

within the operating agreements of MLPs.26 Exculpatory clauses also vary widely in their power, from simple bad faith carve-outs to relief of liability for acts of fraud, willful misconduct, and knowing violation of criminal law, rendering a binary variable ineffective at capturing the spirit of these exculpatory clauses. Restrictions of scope provisions are excluded from the present study as a result of In 2013, Kinder M organ Energy Partners, L.P. (“KM P”) was accused by an analyst of “starving” its assets of needed maintenance in order to maximize distributable cash. See Driver (2013). 26 Fiduciary exculpation clauses are found in the OAs of 88.2% of our sample firms; 76.2% of sample M LPs provide for perpetual operating lives, with others setting forth an operating life of 100 years, well in excess of a typical unitholder’s investment horizon; and GP withdrawal restrictions are employed by all but two M LPs in our sample for which operating agreements are available on the Securities and Exchange Commission’s Edgar Online Database. 25

21

ACCEPTED MANUSCRIPT their decreased use by MLPs over time; Ciccotello and Muscarella (2001) find that only 24% of MLPs formed between 1988 and 1995 included restrictions of scope in their OAs, as compared to 75% from 1981 – 1985. With the shift in focus of MLPs away from steady cash flows and toward growth in the last two decades, we expect that this trend has continued. Indeed, recent studies of MLP governance in the legal literature (e.g. Goodgame, 2005, 2012; Ribstein, 2009; Manesh, 2012) leave such provisions from

IP

T

their analysis. 4.2.2 Ownership measures

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Because the agency problem present in MLPs arises largely from the difference between the GP’s

US

ownership interest and its cash flow rights, we expect that the level of the general partner’s ownership of LP units will play a pronounced role in the determination of dividend policy. This is supported by Tang

AN

and Mori (2017), which studies sponsor ownership of Asian REITs—entities which have ownership structures similar to MLPs—and finds that ownership by the REIT’s sponsor is positively associated with

M

firm performance and negatively associated with dividend yield, though the latter finding is less

ED

pronounced. In addition to GP ownership, we also examine the role of ownership of limited partner units by the MLP’s CEO and by institutional investors in determining firm policies and outcomes. Prior

PT

research has found that higher levels of CEO ownership can compensate for otherwise weak governance,

CE

thereby increasing firm efficiency and stock market performance (Von Lilienfeld-Toal and Ruenzi, 2014). Prior studies find that institutional ownership plays an important role in firm governance (e.g. Tang and

AC

Mori, 2017; Schmidt and Fahlenbrach, 2017; Gillan and Starks, 2000). Here, we consider both direct and indirect institutional ownership of MLPs. Direct ownership is measured as holdings of MLP limited partner units by institutions, scaled by total units outstanding. Indirect institutional ownership is ownership of the MLP’s corporate sponsor, if applicable, by institutional investors. 4.2.3 Empirical models In tests of H1a and H1b, we investigate the relationship between MLP governance characteristics and dividend yield by estimating variations of the following tobit regression model:

22

ACCEPTED MANUSCRIPT DIV_YIELDit = α + β1 FIDUCIARY_WAIVERi + β2 MAND_DISTi + β3 ELECT_BOARDi +

(1)

β4 CEO_OWNit + β5 GP_OWNit + β6 INST_OWNit+ β7 IDRit + β8 SIZEit + β9MBit + β10 LEVit +β11 ROAit + β12 FCFit + β13 CHNG_FCFit + β14 EARN_VOLit + β14 CAPEXit + β14 OPTION_PAYit + β14 NEW_EQUITYit + β14 INDUSTRYit + β14 YEARt + ε.

T

To measure dividend yield, we follow Canil (2017), Cuny et al (2009), and Fenn and Liang

of

interest include

four

contractual governance

provisions—FIDUCIARY_WAIVER,

CR

variables

IP

(2001), and compute annual cash dividends paid, scaled by the market value of equity. The primary

MAND_DIST, ELECT_BOARD, and IDR; and three ownership variables—CEO_OWN, GP_OWN, and

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INST_OWN. The contractual provisions are indicator variables equal to one if such provision is contained in the MLP’s operating agreement, and zero otherwise. The ownership variables represent the proportion

AN

of total units outstanding which are owned by the MLP’s CEO, the general partner of the MLP, and by

M

outside institutional investors, respectively.

We control for firm-level factors shown by prior literature to influence dividend policy (Canil,

ED

2017; Tang and Mori, 2017; Cuny et al, 2009; and Fenn and Liang, 2001). Specifically, we control for

PT

firm size (SIZE), growth opportunities (MB), financing activities (LEV and NEW_EQUITY), performance (ROA, FCF, CHNG_FCF, and EARN_VOL), investment (CAPEX), and compensation (OPTION_PAY).

CE

The variables INDUSTRY and YEAR represent industry and year fixed effects. Because Standard Industry Classification (SIC) codes are remarkably inconsistent for MLPs, we generally follow Manesh (2012) in

AC

classifying MLPs into the following six industries: upstream oil & gas, midstream oil & gas, downstream oil & gas, other natural resources, investment firms, and other. Detailed descriptions of all variables are included in Appendix A. Details on contractual governance provisions, as well as industry classifications, by firm are presented in Appendix B. To test H2, we first study the relationship among dividend yield, governance quality, and firm value, by estimating the following OLS regression model:

23

ACCEPTED MANUSCRIPT (2)

TOBINS_Qit = α + β1 HIGH_DIVSit + β2 FIDUCIARY_WAIVERi + β3 MAND_DISTti + β4 ELECT_BOARDi + β5 HIGH_CEO_OWNit + β6HIGH_GP_OWNi + β7 HIGH_INST_OWNit + β8 IDRt + β9-15 HIGH_DIVSit *GOVERNANCEit + β16SIZEit + β17 PPEit + β18 CASHit + β19 ACCRUALS it + β20 INDUSTRYit + β21 YEARt + εit .

T

Firm value is measured by Tobin’s q, defined as the market value of assets divided by the book

IP

value of assets. To ease the interpretation of interaction terms, we replace DIV_YIELD with HIGH_DIVS,

CR

an indicator variable equal to one if the firm’s dividend yield in year t is above the sample median, zero otherwise. For the same reason, we also replace the continuous variables for CEO, GP, and institutional

US

ownership with indicator variables, constructed using the same methodology as HIGH_DIVS. Following Laplante and Nesbitt (2017), we control for firm-level factors affecting firm value, including measures of

AN

assets (SIZE, PPE, and CASH), a measure of accounting quality (ACCRUALS), and industry and year fixed effects. Laplante and Nesbitt (2017) also control for R&D intensity and advertising expenditures.

M

We exclude these controls as, according to Compustat, only one firm in our sample has R&D activities,

ED

and only six have advertising expense during the sample period.27

PT

As an additional test of H2, we study the relationship among dividend yield, governance quality, and the value of cash. Following Faulkender and Wang (2006), we estimate the following equation: FF_RETit = α + β1 CHANGE_CASHit + β2 FIDUCIARY_WAIVERi + β3 MAND_DISTti +

CE

(3)

β4 ELECT_BOARDi + β5 CEO_OWNit + β6GP_OWNit + β7 INST_OWNit + β8 IDRit + β9CHANGE_CASHit*GOVERNANCEit + β16 CHANGE_EARNit + β17 CHANGE_NAit +

AC

15

β18 CHANGE_INTEXPit + β19 CHANGE_DIVit + β20 CASHit + β21 LEVit + β22 NFit + β23 INDUSTRYit + β24 YEARt + εit . FF_RET is the excess return of the MLP’s stock in year t, defined as the stock’s return less the return of the stock’s benchmark portfolio, which is based on the 25 Fama and French portfolios formed on

27

In untabulated testing, we find that our results are not sensitive to the inclusion of R&D and advertising intensity.

24

ACCEPTED MANUSCRIPT size and market-to-book quintiles. The data for computing this variable is from the website of Kenneth French.28 Our coefficients of interest are those for the interactions of CHANGE_CASH with our measures of governance quality. As in Faulkender and Wang (2006), we control for changes in earnings (CHANGE_EARN), net assets (CHANGE_NA), interest expense (CHANGE_INTEXP), and dividends (CHANGE_DIV); as well as for levels of cash holdings (CASH), leverage (LEV), and financing activities

IP

T

(NF). Detailed descriptions of variable calculations are available in Appendix A. Industry and year fixed

CR

effects are again included. 5. Empirical Results

US

5.1. Governance and dividend yield

Table 3 presents the results of equation (1), with and without firm-level controls. Of primary

AN

interest are the coefficients on the six governance and ownership variables described in Section 4. For both specifications, the coefficients on FIDUCIARY_WAIVER are positive and significant. This suggests

M

that general partners that do not have a fiduciary responsibility to their limited partners pay out more cash

ED

than those that have such a duty. The coefficient on GP_OWN is negative and significant in estimations both with and without controls, evidencing a higher level of cash payout for MLPs in which the general

PT

partner has less economic alignment of interest with the limited partners. In both cases, this is indicative

CE

of a negative relation between governance quality and dividend yield. The coefficient on INST_OWN is negative across specifications, but is not significant at traditional levels (p-value of 0.154 when controls

AC

are included). In untabulated testing, we test the joint significance of our variables of interest, first in groups—contractual governance provisions and ownership measures—and then together, finding them to be jointly significant at traditional levels in all cases. Taken together, the results of tests of H1 suggest that firm governance quality is negatively related to dividend yield. Contrary to the findings of Cuny, et al (2009) and Canil (2017), we do not document a significant relationship between option compensation and dividend policy. However, given the inconsistent reporting 28

See http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

25

ACCEPTED MANUSCRIPT of compensation by MLPs, this non-result should be interpreted with caution. Intuitively, we find that the presence of incentive distribution rights (IDR) is positively associated with dividend yield. Similar to the findings of Cuny el al (2009) with respect to consistent dividend payers, we document a positive and significant relation between leverage (LEV) and dividend yield. Coefficients on measures of operating

IP

consistent with prior literature, but are not significant at traditional levels.

T

performance (ROA), capital expenditures (CAPEX), and free cash flow (FCF) are also directionally

CR

Testing of H1 reveals a negative relationship between governance quality and dividend yield. These findings do not support the traditional outcome model, but the results are not sufficient to

US

determine whether the substitution or tunneling models of dividend determination hold. That is, the negative relationship could either indicate support for the substitution model of dividends, along with a

AN

traditional agency setting as in Easterbrook (1984) and Jensen (1986); or it could support the tunneling model where general partners benefit from the over-distribution of free cash.

M

To better understand the governance-dividend yield relationship among MLPs, we first perform

ED

cross-sectional testing, cutting our sample on an array of characteristics, including IDRs, GP ownership, industry, and publicly-traded sponsors. Next, we examine the effect of MLP governance provisions and

PT

dividend payout on firm-level outcomes—namely, firm value and the value of MLP cash holdings.

CE

5.2. Cross-sectional testing

As discussed in prior sections, Delaware law grants partnerships the freedom to contract over the

AC

responsibilities of management to the limited partners with respect to fiduciary duties and to the resolution of conflicts of interest. While conflicts may arise in the course of business of any MLP, those operating in certain industries could present their general partners with greater opportunity to eschew the interests of limited partners in favor of their own. Specifically, Wolfson (1985) identifies partnerships engaged in “upstream” oil and gas activities (also referred to as exploration and production, or “E&P” activities) as particularly susceptible to conflicts of interest, highlighting the ability of general partners to “prove-up” their own properties using the resources of the partnership. In this setting, general partners may adopt suboptimal drilling strategies in one partnership in order to acquire information useful for

26

ACCEPTED MANUSCRIPT assessing the prospects of nearby drilling properties the GP holds on its own account. Although Wolfson (1985) examines E&P partnerships operating in the 1970s and 1980s, Mandell (2018) finds evidence that the heightened potential for conflicts of interest among upstream MLPs persists, and that this difference is known to market participants. Considering the additional risk associated with upstream oil and gas MLPs, we expect that the relation between governance and dividend yield will be more pronounced for this

IP

T

subset of MLPs, particularly with respect to waivers of fiduciary duty—provisions which directly enhance

CR

the ability of the GP to act on its own account.

To test this, and to control as much as possible for industry characteristics that can drive our

US

results, we first limit our sample to energy MLPs—those involved in the production, transportation, refining, and/or marketing of oil, gas, propane, or coal. 29 We then partition this group into those with

AN

upstream operations (80 firm/year observations) and those without (476 firm/year observations). We next compare the mean values of our dependent and independent variables from equation (1) across groups

M

and repeat our multivariate testing from Section 5.1 for each subsample. The results of this testing are

ED

presented in Table 4.

In Panel A, we find that upstream MLPs have significantly higher mean dividend yield than do

PT

other energy MLPs—13.6% versus 8.5%. This provides early support for our previous finding of a

CE

negative relation between governance quality and dividend yield. The relative governance quality between groups, based upon our variables of interest, is mixed. Upstream MLPs are more likely to have

AC

provisions waiving fiduciary duty but are also more likely to mandate distributions and to grant voting rights to limited partners. Upstream MLPs have higher CEO ownership, on average, but have lower GP ownership and institutional ownership. Panel B presents the results of equation (1) for each subsample. For each group, the negative relation between governance quality and dividend yield is evident, although it is manifested in different

29

We exclude M artin M idstream Partners, LP and K-Sea Transportation Partners, LP—marine transportation M LPs which, despite operating in the energy sector, are subject to additional rules and regulations beyond those imposed on other midstream M LPs.

27

ACCEPTED MANUSCRIPT ways. For the upstream group the coefficient on FIDUCIARY_WAIVER is positive and significant. This variable loads positively for the non-upstream sample as well, but falls just short of statistical significance in two-tailed testing (p-value 0.151). The difference between coefficients on FIDUCIARY_WAIVER across groups is not significant in two-tailed testing (p-value 0.137), possibly as a result of the small sample size—only 80 firm/year upstream observations. Mandatory distributions, which is excluded from

IP

T

tests of the upstream subsample as a result of taking the value 1 for all observations, and GP ownership

CR

are both negative and significant in the non-upstream sample.

The results of Table 4 support our primary finding—that governance quality is negatively related

US

to dividend payout. That fiduciary waivers are more prominent in this relation among upstream MLPs is consistent with Wolfson (1985) which documents the unique susceptibility of upstream oil & gas

AN

partnerships to conflicts of interest between limited and general partners. When general partners do not owe a fiduciary responsibility to the limited partners, they have more leeway to avail themselves of any

M

conflicts of interest that may arise in the course of their management of the MLP. If the substitution

ED

model of dividend determination holds, the results of Table 4 could suggest that investors are aware of the heightened agency costs among upstream MLPs and demand higher dividends as a counter-balance. If, on

PT

the other hand, high dividends are an outcome of poorly governed MLPs, the higher dividend yield

tunneling model.

CE

among upstream MLPs—particularly those with fiduciary waivers—could also evidence support of the

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Tang and Mori (2017) find that sponsor ownership of Asian REITs has a non-linear effect on dividend yield. Specifically, they find that yield is decreasing in sponsor ownership at lower levels and increasing in sponsor ownership when such ownership is high. To better understand the role of GP ownership in dividend setting among MLPs, we next partition our sample on the level of general partner ownership of LP units. The results of splitting our sample between MLPs with above- and below-median GP ownership are presented in Table 5. Panel A reports descriptive statistics for each group and a test of means across groups. Dividend yield is not significantly different across groups. However, MLPs with above median levels of GP ownership are more likely to waive fiduciary duties, and less likely to grant

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ACCEPTED MANUSCRIPT limited partners the right to elect a majority of board members. Additionally, these MLPs have higher ownership by CEOs and lower ownership by outside institutions. Panel B presents the results of equation (1) for each subsample. In both cases, the negative relation between governance and dividend yield is apparent. For MLPs with above-median GP ownership, fiduciary waiver is positively related to yield, while mandatory distributions and GP ownership are

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negatively related to dividend payout. Of these variables, only the coefficient on GP_OWN is negative

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and significant for the below-median GP ownership sample. This suggests that, on the one hand when GP ownership is comparatively low, variation in such ownership is the most critical governance element with

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respect to dividend policy. On the other hand, when GP ownership is high, contractual governance provisions and especially the fiduciary waiver play a greater role in dividend determination, suggesting

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that these provisions serve as compliments to ownership by the GP/parent. The result seems to provide support for the tunneling model, as under the substitution model the positive relation between fiduciary

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waiver and dividends should be particularly strong for low levels of ownership by the general partner. It

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seems that in this case, higher GP ownership increases the power of the general partners vis-à-vis the limited partners, and thus facilitates tunneling.

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The coefficient on IDR is positive and significant for the below-median subsample, suggesting

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that the incentive to distribute cash provided by IDRs is not as important when GP ownership of limited partner units is higher. This makes sense considering that IDRs shift cash from limited partner unitholders

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to general partner unitholders, an incentive which becomes weaker as the share of limited partner units held by the GP increases. Our primary tests include controls for direct institutional ownership in MLPs. However, institutional investors may also influence MLP policies indirectly, through their ownership of the MLP’s general partner, or of its corporate parent/sponsor. Out of the 85 MLPs which form the basis of this study, 38 have a publicly-traded sponsor during at least one year of our sample period (235 firm/year observations). To better understand the effect of this indirect institutional ownership on dividend policy

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ACCEPTED MANUSCRIPT and on its relationship to MLP governance quality, we next partition our sample between those with and without publicly-traded sponsors. This analysis is presented in Table 6. In Panel A, we document mean institutional ownership of public sponsors of 59.1%. We do not document a difference in dividend yield, or in the propensity to waive fiduciary duty, across the two groups. However, MLPs with publicly-held sponsors are more likely to mandate the distribution of free

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cash, to have IDRs and have higher GP ownership. These firms are substantially less likely to grant

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voting rights to limited partners and have lower ownership by their CEOs. They also have higher free cash flows, lower leverage, less volatile earnings, and compensate their executives more heavily with

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options.

Panel B presents the results of estimating equation (1) with the inclusion of two different

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measures of sponsor-level institutional ownership. Column 1 repeats our primary testing, as a point of reference. Column (2) includes the variable INST_OWN_PARENT, which is the percentage of parent

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company shares owned by institutional investors. For firms without a publicly-traded parent, this variable

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is coded as zero. The results presented in column (2) are highly consistent with our primary results, as in column 1 and in Table 3, column 2. They suggest that even though these variables are not statistically

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significant, controlling for them in our models does not affect the results or the conclusion from our

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primary tests.

Panel C presents the results of partitioning the sample on the presence of a public sponsor. For the

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subset of firms without a public sponsor (column 2), fiduciary waiver is associated with higher dividend yield. This is not so for MLPs with a publicly-traded sponsor, and this difference between groups is statistically significant. This suggests that institutional shareholders of the sponsor are able to reduce tunneling opportunities through enhanced oversight. We also find that IDRs are positively related to dividends for firms without a public sponsor, and negatively related to payout for firms with a public sponsor. This difference is also statistically significant, and provides additional support for institutional oversight of parent corporations reducing the propensity of the parent to tunnel the assets of the MLP.

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ACCEPTED MANUSCRIPT However, we also find that ELECT_BOARD is positively associated with dividends for MLPs without a public sponsor, and negatively associated with dividend yield for firms with a publicly traded sponsor (and the difference is statistically significant). The interpretation of this result is less obvious. One possible explanation is that in the presence of a public investor, directors perform their fiduciary duty properly. In the absence of such public monitor, directors (even those appointed by limited partners) can

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be captured by the GP and act against the interests of minority investors. Based on the prior and

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subsequent tests, ELECT_BOARD does not appear to be a powerful determinant of dividend policy, so we interpret the results in Table 6 as generally consistent with a negative relation between governance quality

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and dividend yield, and as supportive of the tunneling model of dividend determination. Because MLP governance and organizational structures are substantially different from those of

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traditional corporations, interpreting the results of our primary testing is relatively more difficult. A key component of this challenge is the use of IDRs among MLPs. Because incentive distribution rights

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increase the GP’s incentive to over-distribute cash, finding that the negative relationship between

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governance and dividend yield is stronger (weaker) for firms with an IDR than for firms without one could provide further support for our hypotheses. With this in mind, we partition our sample into two

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groups, based on whether the GP holds incentive distribution rights with respect to the MLP.

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Table 7 reports the results of splitting the sample on IDR. In Panel A, we present mean values of our variables of interest and controls, and use two-tailed t-tests to compare these values across the IDR

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and non-IDR groups. Here, we find that dividend yield is roughly one percent greater for firms with IDRs than for firms without, though this difference is only significant in one-tailed testing. MLPs with IDRs are significantly more likely to waive their fiduciary duties and to require the distribution of available cash. They also have higher levels of LP ownership by the CEO and by the general partner. Firms without an IDR are more likely to grant voting rights to limited partners. MLPs with an IDR have lower growth opportunities (MB), less volatile earnings (EARN_VOL), and higher leverage (LEV).

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ACCEPTED MANUSCRIPT Panel B reports the results of estimating equation (1) for the two subsamples. For MLPs without an IDR (column (2)), we find that the relationship between governance and dividend yield is somewhat ambiguous. As in our testing of the full sample, we find that fiduciary waivers are positively associated with dividend yield. Consistent with this result, we find that institutional ownership (INST_OWN) is negatively related to yield. However, the coefficient on MAND_DIST is positive and highly significant,

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suggesting a positive relation between governance quality and dividend payout. We find no such

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ambiguity in the subsample of firms with incentive distribution rights. Specifically, we find that FIDUCIARY_WAIVER is again positive and significant, and that mandatory distribution provisions are

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negatively associated with yield, which is consistent with our primary results. That the negative relation between governance and dividend yield appears more pronounced for

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firms with IDRs could suggest that this negative relation is supportive of the tunneling model of dividend determination—where poor governance leads firms to over-distribute cash. However, it is possible that

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the results of Table 7 can be explained more mechanically. That is, the positive coefficient on

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MAND_DIST could indicate that IDRs function as a substitute for mandatory distribution provisions, and vice versa. That firms without IDRs are less likely to have mandatory distribution provisions (Panel A)

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casts some doubt on this alternative explanation. Similarly, our finding that firms with an IDR pay out

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less cash when the GP has a substantial limited partner interest could also have an alternative explanation. Because the IDR diverts cash payments away from limited partners in favor of the GP, if the GP also

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holds a substantial number of LP units, the “incentive” of the IDR is minimized, as it merely diverts cash from the GP (as a limited partner) to itself. To the extent that IDRs are a leading incentive for MLPs to over-distribute cash, our finding of a more pronounced negative relation between dividend yield and governance in this subsample of MLPs could signal that this relation does not evidence support for the substitution hypothesis, and it might instead be evidence of tunneling. However, the presence of alternative interpretations makes these results inconclusive on their own. With this in mind, we next examine the interactive effects of governance and dividend payout on two firm-level outcomes—firm value and the value of MLP cash flows.

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ACCEPTED MANUSCRIPT 5.3. Governance, dividend yield, firm value, and the value of cash Testing of H1 reveals a negative relationship between governance quality and dividend yield. It provides support for the substitution and tunneling models and not for the outcome model. In this subsection, we conduct additional analyses to distinguish between the substitution and the tunneling models.

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Table 8 reports the results from estimating equation (2). Column 1 presents the results of

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regressing firm value (TOBINS_Q) on HIGH_DIVS—an indicator variable set to one if dividend yield is above the median for the sample period, and zero otherwise—and our governance variables of interest,

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without controls. Here, we find no relationship between dividend yield and firm value. We do, however, find evidence of a positive relation between governance quality and firm value, with positive and

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significant coefficients on MAND_DIST and HIGH_GP_OWN. The coefficient on FIDUCIARY_WAIVER is negative, but falls just short of statistical significance in two-tailed testing (p-value 0.116). Column 2

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repeats this analysis but includes an array of controls for firm-level factors which could affect value. The

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results of this specification closely resemble those of column 1. Among the control variables, we find that firm value is negatively related to our measure of size, and positively related to the value of the firm’s

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cash holdings.

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Column 3 is the most important for our analysis. It presents the results of testing the full model, adding interactions between our high-yield indicator and the measures of governance. At the left of

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column 1 are predicted signs under each model of dividend determination. In brief, if the substitution model holds, high dividend yield should mitigate the negative valuation consequences of poor governance. If the substitution (tunneling) model holds, we expect a positive (negative) coefficient on the interaction term between governance and dividend yield. The results presented in column 3 support the tunneling model. We document a negative coefficient on the interaction of HIGH_DIVS with FIDUCIARY_WAIVER, suggesting that high dividends have a deleterious effect on firm value when governance quality is poor.

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ACCEPTED MANUSCRIPT Unlike FIDUCIARY_WAIVER, the negative coefficient on the interaction term between MAND_DIST and high dividend dummy is harder to interpret. This is because mandatory distributions can directly determine dividend policy. A negative coefficient does not necessarily support the substitution hypothesis because it may simply indicate that the market perceives paying too much dividends as a negative. In other words, MAND_DIST does not have the clear corporate governance

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directional effect as does FIDUCIARY_WAIVER. Our results suggest that in conjunction with below-the-

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median dividend payments, having a MAND_DIST is beneficial for firm value, but if the firm pays too much dividend, having a mandatory distribution requirement is less beneficial. This result can also be

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interpreted as supporting the tunneling model as the market views negatively paying too much dividend.30 In untabulated analysis, we find that the total effect of fiduciary waiver on firm value is negative

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and significant (coefficient -0.479, p-value 0.031), and that the total effect of mandatory distribution provisions is positive, but falls just short of significance (p-value 0.108). We also find that the total effect

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of high general partner ownership is positive and significant when dividend yield is high (coefficient

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0.319, p-value 0.049), a result which provides additional support for the tunneling model. In Table 9, we partition our sample by dividend yield—below- versus above-median yield—and

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analyze the relation between governance and firm value for each subsample. Panel A presents mean

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values of our dependent and independent variables for each group, along with a test of differences. High yield firms are more likely to have mandatory distribution provisions, have higher CEO ownership, and

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are more likely to have an IDR. Low yield firms have higher GP ownership, on average. These findings are consistent with our previous testing. Panel B presents the results of estimating equation (2) for the below- and above-median subsamples, along with a test of effects across the two groups. We find that the negative effect of fiduciary waiver is significantly more pronounced for the above-median dividend yield 30

As presented, dividend payout and ownership indicators are computed based on sample median values. In untabulated testing, we repeat this analysis using indicators which are based instead on annual median values, and continue to find support for the tunneling model. Specifically, the coefficient on HIGH_DIVS*FIDUCIARY_WAIVER remains negative and statistically significant (coefficient -0.491, p-value 0.049). Coefficients on the interaction terms for MAND_DIST and IDR are no longer statistically significant at traditional levels. Subsequent firm value testing, including that presented in Table 9, is also robust to this alternative specification.

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ACCEPTED MANUSCRIPT subsample, and that the positive effect of mandatory distribution provisions is significantly larger among below-median yield MLPs. Both of these results are indicative of support for the tunneling model of dividend determination and an agency environment where general partners could benefit from the overdistribution of free cash. As an additional test, we next examine the effect of MLP governance provisions and dividend

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yield on the valuation of MLP cash holdings, with the results presented in Table 10. In Panel B, we first

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test the effects of governance measures on the valuation of cash. While this preliminary test cannot confirm or disconfirm our previous support for the tunneling model, it does offer an additional validation

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of our governance measures. Here, we find that the value of cash is lower for firms that waive fiduciary duty (coefficient -1.731, p-value 0.035). We also document a positive relation between mandatory

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distributions and the value of cash, but this is only significant in one-tailed testing (p-value 0.110). Untabulated testing of the sum of interactions and main effects reveals a negative (positive) cumulative

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effect of fiduciary waiver (mandatory distributions) on excess returns.

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Panel C presents a more direct test of whether the tunneling or substitution model of dividend determination holds. We split our sample based on the presence of a fiduciary waiver and estimate

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equation (3) with an interaction of an indicator variable for above-median dividend yield (HIGH_DIVS)

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with CHANGE_CASH for each subsample. We partition the sample in this way because fiduciary waiver is a clear indicator of poor governance and has shown in previous tests to be a consistent and meaningful

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determinant of firm policy. If the tunneling model holds, we expect that high dividend yield will have a more negative effect on the value of cash when the firm has a fiduciary waiver in place. If the substitution model holds, we expect that high dividend yield will have a more positive effect on the value of cash in the presence of a fiduciary waiver. We observe the former, with high dividend yield having a significantly negative effect on the value of cash for the fiduciary waiver sample, and a significantly positive effect on the value of cash for the subsample without a fiduciary waiver. The difference in effects is significant at the <1% level. In untabulated testing, the cumulative effect of HIGH_DIVS on FFRET is positive and significant in the no waiver subsample (coefficient 1.017, p-value 0.022), and negative and significant in

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ACCEPTED MANUSCRIPT the subsample of firms with a fiduciary waiver (coefficient -2.013, p-value 0.005)—also consistent with the tunneling model of dividend determination. Taken together, tests of H1 and H2 provide support for the tunneling model of dividend determination. That is, firms with lower governance quality pay out more cash dividends than do better governed firms, and, in the presence of low quality governance, these payments decrease the firm’s

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overall value and the value of the firm’s cash holdings, suggesting that they could be viewed by the

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market as a tunneling (extraction) of resources by the general partner at the expense of limited unitholders.

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5.4. Robustness testing

Table 11 presents the results of various robustness tests. In column 1, we repeat our test of

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equation (1) using ordinary least squares regression in place of the Tobit regression presented in Table 3. The results closely resemble those of Table 3, except that the negative coefficient on INST_OWN is now

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also statistically significant in two-tailed testing (p-value 0.074). As a result of the favorable tax treatment

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offered to MLPs in the energy sector, the vast majority of MLPs operate in this area. It is possible that MLPs in other sectors could be subject to different regulation and financial pressures which might

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influence our results. To address this concern, we limit our sample to energy MLPs and repeat our test of

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equation (1). The results of this test are presented in column 2 and are indicative of a negative relationship between governance and dividend yield, consistent with our primary results.

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Given the importance of yield to MLP investors, most MLPs pay regular dividends, with few gaps in quarterly payments. It is possible that MLPs which fail to pay regular dividends are fundamentally different from other MLPs and may skew our results. Columns 3 and 4 of Table 11 address this potential issue. Column 3 limits the sample to those MLPs which paid a dividend in each of the prior two years. Column 4 further limits the sample to only those firms which paid a dividend every year during our sample period. These restrictions reduce our sample by 68 and 213 firm/year observations, respectively. Our results are weakened by these restrictions, but continue to support our prior results showing a

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ACCEPTED MANUSCRIPT negative relation between governance and dividend yield. In both column 3 and 4, we report negative and significant coefficients on ELECT_BOARD and INST_OWN. In untabulated testing, we also examine the effect of general partner ownership of different types of MLP units. In addition to regular LP units, these may include general partner units, which convey the right to manage the MLP and may include incentive distribution rights; subordinated units, which are

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frequently convertible to LP units upon the MLP meeting certain benchmarks; and preferred units, which,

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like preferred stock, typically grant the holder the right to receive dividends at a set level and with a higher priority than regular unitholders. In our primary testing, we consider these units jointly, and

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measure general partner ownership (GP_OWN) as the total ownership interest of the general partner. However, given the disparate incentives these different units may provide, we re-run our testing with

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general partner ownership broken out across the various unit types, using hand-collected data. In these tests, general partner ownership of LP units closely mirrored GP_OWN in sign and significance. The

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coefficient on GP ownership of subordinated units was of the same sign as that of LP units but was not

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significant in any of our tests (0.126 p-value in testing of H1). The coefficient on GP ownership of preferred shares was not significantly different from zero in any of our models. Additionally, the

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inclusion of these variables did not change the sign or significance of any of our variables of interest.

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6. Conclusion

Delaware alternative entity law allows limited partnerships and limited liability companies to

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eliminate managers’ fiduciary duties, mandate distributions of cash flows, and to severely restrict the voting rights of unitholders through the terms of the firm’s operating agreement. These observable, extreme governance elements provide a unique and powerful setting to examine agency-based theories of dividend determination. Further, the chronological separation of the enshrinement of governance characteristics in the operating agreement and the setting of quarterly dividend policy could mitigate some of the endogeneity concerns omnipresent in governance studies. The results presented suggest that the governance environment of MLPs significantly influences their dividend policy and predominantly supports the tunneling model.

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ACCEPTED MANUSCRIPT While the tunneling model has been used to explain corporate governance decisions and outcomes before (Johnson et al., 2000; Bertrand et al., 2002), we are the first to propose and find evidence that weaker governance is associated with higher dividend payments and that these payments reduce firm value and the value of cash holdings. Intuitively, the general partners of the MLPs divert an excessive amount of cash for disbursement, which the market views negatively as there is less to invest in positive

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NPV projects. Despite this potential tunneling by GPs, investors could continue to hold LP units for at

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least two reasons. First, it is possible that, given the high level of ownership by retail investors, some market participants are unaware of this activity. Alternatively, the market participants may be fully aware

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of the potential for tunneling, but still believe MLPs to be a superior investment vehicle for participating in the energy sector. That is, investors may reasonably view MLPs as their best option, and view

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tunneling by the GP as an additional cost to doing business in that area. This paper begins the study of the role of governance in the setting of financial policies of master

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limited partnerships and provides a look into the unique distribution incentives provided to the general

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partners of MLPs. Anecdotal evidence in the financial press and in the courtroom suggests that the incentives of the general partner to disgorge cash may go too far, effectively creating agency costs rather

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than mitigating them. The results of this study provide some evidence that these concerns are shared by

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market participants. Finally, this study informs the academic debate about the ability of contracts to substitute for fiduciary responsibility and is useful to policy makers who may consider replicating

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Delaware’s contracting-favorable legal environment.

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Appendix A Variable Definitions

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ACCEPTED MANUSCRIPT Variable

Definition

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Governance and Dividend Yield Model DIV_YIELD Annual cash dividends paid, scaled by the market value of equity (DVT/ (PRCC_F * CSHO)). FIDUCIARY_WAIVER Indicator variable equal to one if the operating agreement contains a full waiver of fiduciary duty, zero otherwise. MAND_DIST Indicator variable equal to one if the operating agreement contains a provision requiring the distribution of all available cash flow to investors, zero otherwise. ELECT_BOARD Indicator variable equal to one if the operating agreement grants public investors the right to elect the majority or all of the GP’s board members, zero otherwise. CEO_OWN The percentage of MLP units owned by the MLP’s CEO (from Schedules 10-K and DEF-14A) GP_OWN The percentage of MLP units owned by the general partner, or by the beneficial owner(s) of the general partner (from Schedules 10-K and DEF14A). INST_OWN The percentage of MLP units owned by institutional investors (institutional ownership data from Thompson Reuters, divided by total units outstanding, as collected from Schedules 10-K and DEF-14A). INST_OWN_PARENT The percentage of sponsor shares owned by institutional investors (institutional ownership data from Thompson Reuters, divided by total units outstanding (CSHO in Compustat)). IDR Indicator variable equal to one if the general partner holds incentive distribution rights with respect to the partnership. SIZE The natural logarithm of total assets (ln(AT)). MB Ratio of market value of equity to book value of equity ((PRCC_F * CSHO)/CEQ). LEV Total liabilities divided by total assets (LT/AT). ROA Return on assets, defined as income before extraordinary items, scaled by total assets (IB/AT). FCF Free cash flow, defined as operating cash flow scaled by book value of total assets (OANCF/AT) CHNG_FCF Change in free cash flow from year t-1 to year t ((OANCFt – OANCFt 1 )/ATt-1 ). EARN_VOL Firm-level earnings volatility, defined as the standard deviation of EBITDA divided by total assets from year t-2 to year t (STD(EBITDA/AT)(t-2 – t)). CAPEX Capital expenditures scaled by total assets (CAPX/AT). OPTION_PAY Ratio of the value of option compensation paid to the CEO to the CEO’s total compensation (data hand-collected from 10-Ks and proxy statements). NEW_EQUITY Indicator variable equal to one if the firm has issued new shares during the year in excess of 10% of shares issued and outstanding in year t-1. (handcollected from Schedules 10-K). Firm Value Model (repeated variables defined above) TOBINS_Q Market value of assets divided by book value of assets in year t ((AT + (PRCC_F * CSHO) – CEQ)/AT). HIGH_DIVS Indicator variable equal to one if the value of DIV_YIELD is above the

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ACCEPTED MANUSCRIPT sample median, zero otherwise. Variable

Definition

Indicator variable equal to one if the value of CEO_OWN is above the sample median, zero otherwise. HIGH_GP_OWN Indicator variable equal to one if the value of GP_OWN is above the sample median, zero otherwise. HIGH_INST_OWN Indicator variable equal to one if the value of INST_OWN is above the sample median, zero otherwise. PPE Book value of property, plant, and equipment divided by total assets (PPENT/AT). CASH Book value of cash and cash equivalents divided by total assets (CHE/AT). ACCRUALS Operating cash flow less income before extraordinary items, divided by total assets ((OANCF-IB)/AT). Value of Cash Model (repeated variables defined above) FFRET The stock’s excess return in year t, defined as the stock’s return less the return of the stock’s benchmark portfolio, which is based on the 25 Fama and French portfolios formed on size and market-to-book quintiles (based on Faulkender and Wang (2006)). CASH Book value of cash and cash equivalents in year t-1, divided by market value of equity in year t-1 (CHE t-1 /(PRCC_Ft-1 * CSHOt-1 )). CHANGE_CASH The change in cash holdings from year t-1 to year t ((CHEt – CHEt1 )/(PRCC_Ft-1 * CSHOt-1 ). CHANGE_EARN The change in income before extraordinary items from year t-1 to year t ((IBt – IBt-1 )/(PRCC_Ft-1 * CSHOt-1 ). CHANGE_NA The change in total assets minus cash holdings from year t-1 to year t (((AT – CHE)t – (AT – CHE)t-1 )/(PRCC_Ft-1 * CSHOt-1 )). CHANGE_INTEXP The change in interest expense from year t-1 to year t ((XINTt – XINTt1 )/(PRCC_Ft-1 * CSHOt-1 ). NF New financing, defined as equity issuance minus repurchases plus debt issuance minus debt redemption (((CSHI * PRCC_Ft-1 ) – PRSTKCC + DLTIS – DLTR)/(PRCC_Ft-1 * CSHOt-1 )). All continuous variables are winsorized at 1% and 99%.

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HIGH_CEO_OWN

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ACCEPTED MANUSCRIPT Appendix B Governance Provisions of Sample Firms1

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Fiduciary Mandatory Waiver Distributions No Yes Yes Yes Yes Yes Yes No Yes Yes No Yes Yes Yes Yes Yes No Yes Yes Yes No No Yes Yes Yes Yes Yes Yes Yes Yes No Yes No Yes Yes Yes No Yes Yes Yes No Yes Yes Yes No Yes No Yes No Yes Yes No No Yes No Yes No Yes Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes No Yes No Yes Yes Yes

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Industry Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Midstream Oil & Gas Upstream Oil & Gas Upstream Oil & Gas

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Company Name Atlas Pipeline Partners, LP Blueknight Energy Partners, LP Boardwalk Pipeline Partners, LP Buckeye Partners, LP Calument Specialty Products Partners, LP Central Energy Partners, LP Cheniere Energy Partners, LP Chesapeake Midstream Partners, LP Copano Energy, LLC Crestwood Midstream Partners, LP Crosstex Energy, LP DCP Midstream Partners, LP Duncan Energy Partners, LP Eagle Rock Energy Partners, LP El Paso Pipeline Partners, LP Enbridge Energy Partners, L.P. Energy Transfer Partners, LP Energy Transfer Equity, LP Enterprise Products Partners, LP Exterran Partners, LP Genesis Energy, LP Holly Energy Partners, LP Kinder Morgan Energy Partners, LP Magellan Midstream Partners, LP MarkWest Energy Partners, LP Niska Gas Storage Partners, LLC NuStar Energy, LP NuStar GP Holdings, LLC ONEOK Partners, LP PAA Natural Gas Storage, LP Plains All American Pipeline, LP Regency Energy Partners LP Spectra Energy Partners, LP Sunoco Logistics Partners L.P. Targa Resources Partners LP TC PipeLines, LP Tesoro Logistics LP TransMontaigne Partners L.P. Western Gas Partners, LP Williams Partners L.P. K-Sea Transportation Partners L.P. Martin Midstream Partners L.P. Atlas Energy, L.P. BreitBurn Energy Partners L.P.

Elect Board No No No Yes No No No No Yes No No No No Yes No No No No No No No No No Yes Yes No No Yes No No No No No No No No No No No No No No Yes Yes

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W. P. Carey & Co. LLC

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America First Tax Exempt Investors, L.P. Ellington Financial LLC

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Municipal Mortgage & Equity, LLC AllianceBernstein Holding L.P. Apollo Global Management, LLC Blackstone Group L.P. Fortress Investment Group LLC Icahn Enterprises L.P. KKR & Co. L.P.

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Fiduciary Mandatory Waiver Distributions Yes Yes No Yes Yes Yes Yes Yes Yes Yes No Yes No Yes Yes Yes Yes Yes Yes Yes No Yes No Yes Yes Yes No Yes Yes Yes No Yes No Yes No Yes Yes Yes Yes No No Yes Yes Yes Yes Yes No No No Yes No Yes

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Industry Upstream Oil & Gas Upstream Oil & Gas Upstream Oil & Gas Upstream Oil & Gas Upstream Oil & Gas Upstream Oil & Gas Upstream Oil & Gas Upstream Oil & Gas Upstream Oil & Gas Upstream Oil & Gas Downstream Oil & Gas Downstream Oil & Gas Downstream Oil & Gas Downstream Oil & Gas Downstream Oil & Gas Downstream Oil & Gas Downstream Oil & Gas Coal, Mineral, & Timber Coal, Mineral, & Timber Coal, Mineral, & Timber Coal, Mineral, & Timber Coal, Mineral, & Timber Coal, Mineral, & Timber Coal, Mineral, & Timber Coal, Mineral, & Timber Investments – Finance & Real Estate Investments – Finance & Real Estate Investments – Finance & Real Estate Investments – Finance & Real Estate Investments – Finance & Real Estate Investments – Finance & Real Estate Investments – Finance & Real Estate Investments – Finance & Real Estate Investments – Finance & Real Estate Investments – Finance & Real Estate Investments – Finance & Real Estate

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Company Name Constellation Energy Partners LLC Dorchester Minerals, L.P. Encore Energy Partners LP EV Energy Partners, L.P. Legacy Reserves LP Linn Energy, LLC Penn Virginia Resource Partners, L.P. Pioneer Southwest Energy Partners, L.P. QR Energy, LP Vanguard Natural Resources, LLC AmeriGas Partners, L.P. Ferrellgas Partners, L.P. Global Partners LP Inergy, L.P. NGL Energy Partners LP Star Gas Partners, L.P. Suburban Propane Partners, L.P. Alliance Resource Partners, L.P. Alliance Holdings GP, L.P. CVR Partners, LP Natural Resource Partners L.P. Oxford Resource Partners, LP Rhino Resource Partners LP Pope Resources Terra Nitrogen Company, L.P. NTS Realty Holdings Limited Partnership

Elect Board Yes No No No Yes Yes Yes No No Yes No No No No No No Yes No No No No No No No No Yes

No

No

Yes

No

Yes

No

No

No

Yes

No

No

Yes

No

Yes

No

Yes

No

No

Yes

No

No

No

No

Yes

No

No

No

Yes

No

No

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ACCEPTED MANUSCRIPT Investments – Finance & No No Yes Real Estate Och-Ziff Capital Management Group LLC Investments – Finance & No No Yes Real Estate Cedar Fair, L.P. Other No Yes Yes ML Macadamia Orchards, L.P. Other No No No StoneMor Partners L.P. Other Yes Yes No 1 Data obtained from Appendices A, B, & C of Manesh (2012), with industry classifications modified in some cases.

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KKR Financial Holdings LLC

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ACCEPTED MANUSCRIPT References Adjaoud, F. and Ben-Amar, W. 2010. Corporate Governance and Dividend Policy: Shareholders’ Protection or Expropriation? Journal of Business Finance & Accounting, 37(5) & (6). Allen, F. and Michaely, R. 2003. Payout policy. Handbook of the Economics of Finance, Volume 1, Part A.

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Bartram, S., Brown, P., How, J., and Verhoeven, P. 2008. Agency conflicts and corporate payout policies: A global study. Lancaster University, Working Paper.

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Bertrand, M., Mehta, P., and Mullainathan, S. 2002. Ferreting out Tunneling: An Application to Indian Business Groups. The Quarterly Journal of Economics, February 2002. Brockman, P. and Unlu, E. 2009. Dividend Policy, Creditor Rights, and the Agency Costs of Debt. Journal of Financial Economics, 92.

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Byrne, J. and O’Connor, T. 2012. Creditor rights and the outcome model of dividends. The Quarterly Review of Economics and Finance, 52.

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Canil, J. 2017. Non-dividend protected executive options and dividend policy: Evidence from SFAS 123R. Journal of Corporate Finance, 44, 15-33.

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Ciccotello, C. and Muscarella, C. 1997. Matching Organizational Structure with Firm Attributes: A Study of Master Limited Partnerships. European Finance Review, 1, 169-191.

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Ciccotello, C. and Muscarella, C. 2001. Contracts between managers and investors: a study of master limited partnership agreements. Journal of Corporate Finance, 7.

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Collins, J.M., and Bey, R.P. 1986. The master limited partnership: an alternative to the corporation. Financial Management, 15.

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Creswell, J. 2003. The Anti-Enron. Fortune, 148.

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Cuny, C., Martin, G., Puthenpurackal, J. 2009. Stock options and total payout. Journal of Financial and Quantitative Analysis. 44, 391-410. Denis, D. and Osobov, I. 2008. Why do firms pay dividends? International evidence on the determinants of dividend policy.Journal of Financial Economics, 89. Dittmar, A. and Mahrt-Smith, J. 2007. Corporate Governance and the Value of Cash Holdings. Journal of Financial Economics, 83, 599-634. Driver, A. 2013. Upstart analyst says Kinder ‘starves’ assets for investors. Reuters. Easterbrook, F. 1984. Two Agency-Cost Explanations of Dividends. The American Economic Review, Vol. 74, No. 4. Faleye, O. 2007. Classified boards, firm value, and managerial entrenchment. Journal of Financial Economics, Volume 83, Issue 2.

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Faulkender, M. and Wang, R. 2006. Corporate Financial Policy and the Value of Cash. The Journal of Finance, 61 (4): 1957-1990. Fenn, G. and Liang, N. 2001. Corporate payout policy and managerial stock incentives. Journal of Financial Economics, Volume 60, 45-72.

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Gaver, J. and Gaver, K. 1993. Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Accounting and Economics, Volume 16, 1-3.

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Gentry, W.M. 1994. Taxes, Financial Decisions, and Organizational Form: Evidence from Publicly Traded Partnerships. Journal of Public Economics, Vol. 53, No. 2. Gillan, S. and Starks, L. 2000. Corporate governance proposals and shareholder activism: The role of institutional investors. Journal of Financial Economics.

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Gompers, P., Ishii, J., and Metrick, A.Corporate Governance and Equity Prices.Quarterly Journal of Economics.

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Goodgame, J. 2005. Master Limited Partnership Governance. The Business Lawyer, Vol. 60, No. 2.

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Goodgame, J. 2012. New Developments in Master Limited Partnership Governance. The Business Lawyer, Vol. 68.

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Graham, J. R. and Kumar, A. 2006. Do Dividend Clienteles Exist? Evidence on Dividend Preferences of Retail Investors. The Journal of Finance, 61 (3): 1305-1336.

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Grullon, G., Michaely, R., and Swaminathan, B. 2002. Are dividend changes a sign of firm maturity? The Journal of Business, Vol. 75, No. 3.

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Guenther, D. 1992. Taxes and Organizational Form: A Comparison of Corporations and Master Limited Partnerships. The Accounting Review, Vol. 67, No. 1. Hampton, L. 2018. NuStar, other energy partnerships simplify business models to spur growth. Reuters.

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Harford, J., Mansi, S., and Maxwell, W. Corporate governance and firm cash holdings in the U.S. Journal of Financial Economics, Vol. 87. Horton, B. 2013. The Going-Private Freeze-Out: A Unique Danger for Investors in Delaware NonCorporate Business Associations. Delaware Journal of Corporate Law, Vol. 38. Hu, A. and Kumar, P. 2004. Managerial Entrenchment and Payout Policy. Journal of Financial and Quantitative Analysis, Vol. 39. Jensen, M. 1986. Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. The American Economic Review, Vol. 76. Jiraporn, P., Kim, J. and Kim, Y. 2011. Dividend Payouts and Corporate Governance Quality: An Empirical Investigation. The Financial Review, 46.

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ACCEPTED MANUSCRIPT Jo, H. and Pan, C. 2009. Why are firms with entrenched managers more likely to pay dividends? Review of Accounting and Finance, 8. John, K. and Knyazeva, A. 2006. Payout policy, agency conflicts, and corporate governance. New York University, Working Paper. Johnson, S., La Porta, R., Lopez-de-Silanes, F., and Shleifer, A. 2000a. Tunneling. American Economic Review Papers and Proceedings, 90, 22-27.

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Johnson S., Boone, P., Breach, A., Friedman, E. 2000b. Corporate Governance in the Asian Financial Crisis, Journal of Financial Economics, 58, 141-186

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Karamanou, I. and Vafeas, N. 2005. The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis. Journal of Accounting Research, Vol. 43.

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Karpoff, J.M. 2001. The impact of shareholder activism on target companies: A survey of empirical findings. Working Paper, University of Washington. Kendall, L.K, and Rogers, N. 2017. Uncorporates: changes in master limited partnerships. Managerial Finance, Vol. 46 Issue: 6, 720-735.

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Laplante, S. and Nesbitt, W. 2017. The Relation Among Trapped Cash, Permanently Reinvested Earnings, and Foreign Cash. Journal of Corporate Finance, 44: 126-148.

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La Porta, R., Lopez-de-Silanes, F., and Shleifer, A. 1999. Corporate Ownership around the World. Journal of Finance, Vol. 54.

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La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R.W. 1998. Law and Finance. Journal of Political Economy 106, 1113-1155.

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La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R.W. 2000. Agency Problems and Dividend Policies around the World. Journal of Finance, Vol. 55.

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La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R.W. 2002. Investor Protection and Corporate Valuation. Journal of Finance, Vol. 57.

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Mandell, A. 2018. Equity Valuation Consequences of the New Wave of Master Limited Partnership Formations. Working Paper, University of Wisconsin-Milwaukee. Manesh, M. 2009. Legal Asymmetry and the End of Corporate Law. The Journal of Corporation Law, Vol. 34. Manesh, M. 2011. Delaware and the Market for LLC Law: A Theory of Contractibility and Legal Indeterminacy. Boston College Law Review, Vol. 52. Manesh, M. 2012. Contractual Freedom Under Delaware Alternative Entity Law: Evidence from Publicly Traded LPs and LLCs. The Journal of Corporation Law, Vol. 37:3. Mitton, T. 2004. Corporate governance and dividend policy in emerging markets. Emerging Markets Review, Vol. 5.

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ACCEPTED MANUSCRIPT NYSE, Listed Company Manual, Section 3. Officer, M. 2007. Dividend policy, dividend initiations, and governance. Working paper, University of Southern California. Ribstein, L. 2009. Partnership Governance of Large Firms. The University of Chicago Law Review. Schmidt, C., and Fahlenbrach, R. 2017. Do Exogeneous Changes in Passive Institutional Ownership Affect Corporate Governance and Firm Value? Journal of Financial Economics, 124: 285-306.

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Sharma, V. 2011. Independent directors and the propensity to pay dividends. Journal of Corporate Finance, 17.

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Shleifer, A. and Vishny, R. 1986. Large Shareholders and Corporate Control. Journal of Political Economy, Vol. 94, No. 3.

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Tang, C.K., and Mori, M. 2017. Sponsor Ownership in Asian REITs. Journal of Real Estate Finance and Economics, 55: 265-287.

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Von Lilienfeld-Toal, U., and Ruenzi, S. 2014. CEO Ownership, Stock Market Performance, and Managerial Discretion. The Journal of Finance, 69(3), 1013-1050.

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Wolfson, M. 1985. Empirical Evidence of Incentive Problems and Their Mitigation in Oil and Gas Tax Shelter Programs. Principals and agents: the structure of business.

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ACCEPTED MANUSCRIPT

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Exhibit 1 Organizational Chart - Blueknight Energy Partners, LP

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ACCEPTED MANUSCRIPT Exhibit 2 Sample Incentive Distribution Note 10 to the Consolidated Financial Statements of Kinder Morgan Energy Partners, L.P. Marginal percentage interest in distribution Total quarterly distribution per unit target amount $0.15125

Thereafter

above $0.23375

GP

98% 85%

2% 15%

75%

25%

50%

50%

IP

Third target distribution

above $0.15125 up to $0.17875 above $0.17875 up to $0.23375

Unitholders

T

First target distribution Second target distribution

98% to all owners of common units and Class B units pro rata in cash and to the holder of i-units in equivalent i-units; and 2% to our general partner, until we have distributed cash from this source in respect of a common unit outstanding since our original public offering in an aggregate amount per unit equal to the initial common unit price of $5.75, as adjusted for splits.

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▪ ▪

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Allocation of Distributions from Interim Capital Transactions . Any distribution by us of available cash that would constitute cash from interim capital transactions would be distributed effectively as follows:

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As cash from interim capital transactions is distributed, it would be treated as if it were a repayment of the initial public offering price of the common units. To reflect that repayment, the first three distribution target levels of cash from operations (described above) wo uld be adjusted down war d proportionately by multiplying each distribution target level amount by a fraction, the numerator of which is the unrecovered initial common unit price immediately after giving effect to that distribution and the denominator of which is the unrecovered initial common unit price immediately prior to giving effect to that distribution. When the initial common unit price is fully recovered, then each of the first three distribution target levels will have been reduced to zero, and thereafter, all distributions of available cash from all sources will be treated as if they were cash from operations and available cash will be distributed 50% to all classes of units pro rata (with the distribution to i-units being made instead in the form of i-units), and 50% to our general partner. With respect to the portion of our distribution of available cash for 2010 that was from interim capital transactions, our general partner waived this resetting of the distribution target levels.

Kinder Morgan G.P., Inc.

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Kinder Morgan G.P., Inc. serves as our sole general partner. Pursuant to our partnership agreement, our general partner’s interests represent a 1% ownership interest in us, and a direct 1.0101% ownership interest in each of our five operating partnerships. Collectively, our general partner owns an effective 2% interest in our operating partnerships, excluding incentive distributions rights as follows:

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▪ its 1.0101% direct general partner ownership interest (accounted for as a noncontrolling interest in our consolidated financial statements); and ▪ its 0.9899% ownership interest indirectly owned via its 1% ownership interest in us.

KMI

AC

As of December 31, 2013, our general partner owned 1,724,000 common units, representing approximately 0.39% of our outstanding limited partner units. For information on distributions paid to our general partner, see Note 10 “Partners’ Capital—Income Allocation and Declared Distributions.”

KMI remains the sole indirect common stockholder of our general partner. Also, as of December 31, 2013, KMI directly owned 18,169,815 common units, indirectly owned 5,313,400 Class B units and 4,117,640 common units through its consolidated affiliates (including our general partner), and owned 15,934,516 KM R shares, representing an indirect ownership interest of

15,934,516 i-units. T ogether, these units represented approximately 9.8% of our outstanding limited partner units. Including both its general and limited partner interests in us, at the 2013 distribution level, KMI received approximately 49% of all quarterly distributions of available cash from us, with approximately 43% attributable to its general partner interest and the remaining 6% attributable to its limited partner interest. T hese percentages were impacted slightly due to the general partner’s waiver of certain incentive distribution amounts, as described in Note 10 “ Partners’ Capital—Income Allocation and Declared Distributions.”

KMR

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ACCEPTED MANUSCRIPT

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As of December 31, 2013, KMR, our general partner’s delegate, remained the sole owner of our 125,323,734 i-units.

51

ACCEPTED MANUSCRIPT Table 1 Descriptive Statistics – Governance Provisions Panel A Summary Governance Provisions of Sample Firmsa No

Total

% Yes

Fiduciary Waiver

42

43

85

49.4%

Mandatory Distributions

69

16

Elect Board

22

63

81.2%

85

25.9%

IP

85

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Governance provisions, as of June 2011, obtained from M anesh (2012) and reproduced in Appendix B.

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Panel B Correlation among governance provisions of sample firmsb

M

Fiduciary Waiver

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Fiduciary Waiver

Mandatory Distributions

1.0000 0.0678

1.0000

Elect Board

-0.2931

-0.2548

PT

Mandatory Distributions

1.0000

Governance provisions, as of June 2011, obtained from M anesh (2012) and reproduced in Appendix B.

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b

Elect Board

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a

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Yes

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Governance Provision

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ACCEPTED MANUSCRIPT Table 2 Descriptive Statistics This table reports major firm, co mpensation, and ownership-based characteristics of the final, primary testing sample of 690 firm-year observations for which all data are availab le. Variables are defined as in Appendix A. A ll continuous variables are winsorized at 1% and 99%.

Mean

P25

Median

P75

Std. Dev.

DIV_YIELD

690

0.089

0.050

0.070

0.093

0.091

FIDUCIARY_WAIVER

690

0.426

0

0

MAND_DIST

690

0.807

1

ELECT_BOARD

690

0.222

0

CEO_OWN

690

0.072

0.001

GP_OWN

690

0.302

0.112

INST_OWN

690

0.287

IDR

690

0.597

SIZE

690

7.593

MB

690

2.827

LEV

690

ROA

690

FCF

690

0

0

0.416

0.004

0.032

0.171

0.272

0.443

0.237

0.145

0.248

0.413

0.187

0

1

1

0.491

6.753

7.578

8.547

1.496

1.287

2.073

3.135

5.749

0.557

0.454

0.586

0.675

0.221

0.105

0.064

0.098

0.141

0.104

0.119

0.065

0.101

0.148

0.109

690

0.022

-0.013

0.012

0.042

0.089

690

0.033

0.009

0.017

0.035

0.045

690

0.077

0.020

0.049

0.103

0.090

690

0.027

0

0

0

0.093

690

0.335

0

0

1

0.472

CR

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0.395

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1

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NEW_EQUITY

1

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OPTION_PAY

0.495

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EARN_VOL CAPEX

1

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CHNG_FCF

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N

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Variable

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ACCEPTED MANUSCRIPT Table 3 Effect of MLP Governance Characteristics on Dividend Yield This table reports the results from tobit regressions of dividend yield on governance characteristics, compensation and unit ownership elements, and a set of controls. Industry and year indicator variables are included in each estimation but are not reported. All other variables are defined in Appendix A. (1) (2) Full Sample Full Sample VARIABLES Div. Yield Div. Yield

MAND_DIST

CR

ELECT_BOARD CEO_OWN

US

GP_OWN INST_OWN

AN

IDR SIZE

M

MB

ED

LEV ROA

PT

FCF CHNG_FCF

CAPEX

AC

OPTION_PAY

CE

EARN_VOL

NEW_EQUITY

Observations Year & Industry FE

788 YES P-values in parentheses. *** p<0.01, ** p<0.05, * p<0.1

0.016** (0.020) 0.011 (0.317) 0.009 (0.328) 0.003 (0.901) -0.039** (0.020) -0.027 (0.154) 0.020** (0.029) 0.003 (0.317) 0.000 (0.800) 0.047*** (0.005) -0.059 (0.170) -0.057 (0.258) 0.047 (0.302) 0.202** (0.013) -0.052 (0.191) -0.042 (0.218) -0.008 (0.232)

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0.020*** (0.002) 0.009 (0.390) 0.002 (0.775) 0.010 (0.604) -0.037** (0.012) -0.011 (0.535)

IP

FIDUCIARY_WAIVER

690 YES

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ACCEPTED MANUSCRIPT Table 4 Effect of MLP Governance Characteristics on Dividend Yield Upstream Oil & Gas MLPs

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This table reports the results of testing when limiting the samp le to energy MLPs and partitioning based on whether the MLP is engaged in upstream o il & gas activities (explorat ion and/or production). Panel A reports tests of means of dependent and independent variables for energy MLPs engaged in, and not engaged in, upstream act ivities. Panel B reports tobit regressions of dividend yield on governance characteristics, unit ownership elements, and a set of controls (untabulated) for energy MLPs engaged in, and not engaged in, upstream activit ies. Differences in coefficients in Panel B are co mputed using Wald chi -square tests. All variables are as defined in Appendix A. Panel A: Means testing – Upstream vs. Non-Upstream Energy MLPs Upstream Non-Upstream Difference MLPs MLPs (t-value) DIV_YIELD 0.136 0.085 0.000*** FIDUCIARY_WAIVER 0.638 0.465 0.004*** MAND_DIST 1 0.934 0.018** ELECT_BOARD 0.438 0.149 0.000*** CEO_OWN 0.076 0.046 0.069* GP_OWN 0.158 0.306 0.000*** INST_OWN 0.180 0.312 0.000*** IDR 0.400 0.779 0.000*** SIZE 6.663 7.797 0.000*** MB 2.437 2.952 0.451 LEV 0.457 0.595 0.000*** ROA 0.133 0.109 0.041** FCF 0.190 0.119 0.000*** CHNG_FCF 0.021 0.024 0.708 EARN_VOL 0.077 0.022 0.000*** CAPEX 0.147 0.076 0.000*** OPTION_PAY 0.008 0.037 0.021** NEW_EQUITY 0.388 0.375 0.832 N 80 476 Panel B: Multivariate analysis – Governance and Div. Policy - Upstream vs. Non-Upstream Energy MLPs (1) (2) Difference VARIABLES Upstream Non-Upstream (p-value) FIDUCIARY_WAIVER 0.047** 0.011 0.137 (0.037) (0.151) MAND_DIST -0.033** N/A (0.043) ELECT_BOARD -0.022 -0.024 0.935 (0.398) (0.132) CEO_OWN -0.012 -0.013 0.998 (0.930) (0.751) GP_OWN -0.021 -0.041* 0.781 (0.758) (0.081) INST_OWN 0.107 0.002 0.594 (0.585) (0.934) IDR -0.049 0.014 0.090* (0.171) (0.174) N Controls Industry & Year FE

80 YES YES

476 YES YES

All continuous variables are winsorized at 1% and 99%. *** p<0.01, ** p<0.05, * p<0.1

55

ACCEPTED MANUSCRIPT Table 5 Effect of MLP Governance Characteristics on Dividend Yield Firms With Below- and Above-Median GP Ownership This table reports the results of testing when partitioning the sample by general partner ownership. Panel A reports tests of means of dependent and independent variables for firms with below- and above-median GP ownership. Panel B reports tobit regressions of dividend yield on governance characteristics, compensation, and unit ownership elements, and a set of controls (untabulated) for firms with below- and above-median GP ownership. Differences in coefficients in Panel B are computed using Wald chi-square tests. All variables are as defined in Appendix A.

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Panel A: Means testing – Below-Median vs. Above-Medi an GP Ownership BelowAboveDifference Median Median (t-value) DIV_YIELD 0.092 0.086 0.443 FIDUCIARY_WAIVER 0.322 0.530 0.000*** MAND_DIST 0.829 0.786 0.148 ELECT_BOARD 0.371 0.072 0.000*** CEO_OWN 0.047 0.097 0.000*** GP_OWN 0.108 0.497 0.000*** INST_OWN 0.309 0.281 0.044** IDR 0.496 0.699 0.000*** SIZE 7.665 7.521 0.207 MB 2.864 2.790 0.862 LEV 0.559 0.555 0.841 ROA 0.097 0.114 0.030** FCF 0.108 0.130 0.008*** CHNG_FCF 0.016 0.027 0.089* EARN_VOL 0.033 0.032 0.816 CAPEX 0.073 0.080 0.301 OPTION_PAY 0.020 0.034 0.052* NEW_EQUITY 0.342 0.328 0.687 N 345 345

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Panel B: Multivariate analysis – Below-Medi an vs. Above-Median GP Ownership (1) (2) Difference Below-Medi an Above-Median (p-value) FIDUCIARY_WAIVER -0.008 0.024** 0.066* (0.438) (0.024) MAND_DIST 0.018 -0.033** 0.017** (0.182) (0.024) ELECT_BOARD -0.000 0.011 0.714 (0.989) (0.595) CEO_OWN -0.012 -0.009 0.956 (0.689) (0.736) GP_OWN -0.132** -0.066** 0.386 (0.013) (0.050) INST_OWN -0.042 -0.014 0.590 (0.272) (0.609) IDR 0.021* 0.002 0.340 (0.077) (0.871) N Controls Industry & Year FE

345 YES YES

345 YES YES

All continuous variables are winsorized at 1% and 99%. *** t<0.01, ** t<0.05, * t<0.1

56

ACCEPTED MANUSCRIPT Table 6 Effect of MLP Governance Characteristics on Dividend Yield Based on Institutional Ownership of Publicly-Traded Sponsors

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Panel A reports tests of means of dependent and independent variables for firms with and without a public sponsor. Panel B reports tobit regressions of dividend yield on governance characteristics, unit ownership elements, and a set of controls (untabulated). In Panel B, colu mn 2, INST_OW N_PARENT is set to zero for MLPs without a publicly-traded sponsor. Panel C reports tobit regressions of dividend yield on governance characteristics, compensation, and unit ownership elements, and a set of controls (untabulated) for firms with and without a publicly-traded sponsor. Differences in coefficients in Panel C are co mputed using Wald chi-square tests. All other variables are as defined in Appendix A. Panel A: Means testing – With vs. Without Publicly-Traded Sponsor Public No Public Difference Sponsor Sponsor (t-value) DIV_YIELD 0.085 0.091 0.435 FIDUCIARY_WAIVER 0.451 0.413 0.341 MAND_DIST 0.902 0.758 0.000*** ELECT_BOARD 0.055 0.308 0.000*** CEO_OWN 0.025 0.096 0.000*** GP_OWN 0.369 0.268 0.000*** INST_OWN 0.273 0.295 0.151 INST_OWN_PARENT 0.591 0 N/A IDR 0.885 0.448 0.000*** SIZE 7.678 7.549 0.286 MB 2.370 3.063 0.133 LEV 0.511 0.581 0.000*** ROA 0.115 0.100 0.069* FCF 0.138 0.109 0.000*** CHNG_FCF 0.030 0.172 0.075* EARN_VOL 0.024 0.037 0.000*** CAPEX 0.074 0.078 0.588 OPTION_PAY 0.043 0.018 0.001*** N 235 455 Panel B: Multivariate analysis – Institutional Ownership of Publicly-Traded Sponsors (1) (2) VARIABLES DIV_YIELD DIV_YIELD FIDUCIARY_WAIVER 0.016** 0.016** (0.020) (0.020) MAND_DIST 0.011 0.011 (0.317) (0.334) ELECT_BOARD 0.009 0.009 (0.328) (0.326) CEO_OWN 0.003 0.002 (0.901) (0.936) GP_OWN -0.039** -0.038** (0.020) (0.022) INST_OWN -0.027 -0.028 (0.154) (0.150) INST_OWN_PARENT -0.003 (0.811) IDR 0.020** 0.021** (0.029) (0.030) N Controls Industry & Year FE

690 YES YES

690 YES YES

57

ACCEPTED MANUSCRIPT

235 YES YES

0.181 0.006***

T

0.120

IP

0.631 0.950

0.003***

455 YES YES

US

N Controls Industry & Year FE

Difference (p-value) 0.086*

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Panel C: Multivariate analysis – Firms With and Without Public Sponsor (1) (2) Public Not Public FIDUCIARY_WAIVER -0.000 0.022** (0.971) (0.017) MAND_DIST -0.031* 0.021 (0.067) (0.233) ELECT_BOARD -0.054** 0.035*** (0.039) (0.003) CEO_OWN 0.191** 0.012 (0.028) (0.616) GP_OWN -0.055 -0.032 (0.143) (0.145) INST_OWN -0.016 -0.021 (0.752) (0.374) IDR -0.076*** 0.046*** (0.005) (0.000)

AC

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PT

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M

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All continuous variables are winsorized at 1% and 99%. *** p<0.01, ** p<0.05, * p<0.1

58

ACCEPTED MANUSCRIPT Table 7 Effect of MLP Governance Characteristics on Dividend Yield Firms With and Without Incentive Distribution Rights

MAND_DIST

AC

ELECT_BOARD

CE

FIDUCIARY_WAIVER

CEO_OWN GP_OWN

PT

ED

M

AN

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This table reports the results of testing when partitioning the sample by IDR. Panel A reports tests of means of dependent and independent variables for firms with and without incentive distribution rights. Panel B reports tobit regressions of dividend yield on governance characteristics, compensation, and unit ownership elements, and a set of controls (untabulated) for firms with and without IDRs. Differences in coefficients in Panel B are co mputed using Wald chi-square tests. All variables are as defined in Appendix A. Panel A: Means testing – IDR vs. No IDR Difference IDR No IDR (t-value) DIV_YIELD 0.093 0.083 0.148 FIDUCIARY_WAIVER 0.478 0.349 0.000*** MAND_DIST 0.944 0.604 0.000*** ELECT_BOARD 0.058 0.464 0.000*** CEO_OWN 0.044 0.113 0.000*** GP_OWN 0.328 0.265 0.001*** INST_OWN 0.280 0.299 0.193 SIZE 7.555 7.650 0.414 MB 2.412 3.441 0.021** LEV 0.609 0.480 0.000*** ROA 0.106 0.105 0.914 FCF 0.119 0.119 0.984 CHNG_FCF 0.026 0.015 0.145 EARN_VOL 0.023 0.047 0.000*** CAPEX 0.078 0.075 0.588 OPTION_PAY 0.039 0.009 0.000*** NEW_EQUITY 0.415 0.216 0.000*** N 412 278 Panel B: Multivariate analysis – IDR vs. No IDR

INST_OWN N Controls Industry & Year FE

(1) IDR 0.017* (0.085) -0.046*** (0.009) -0.020 (0.298) -0.067 (0.141) -0.079*** (0.002) 0.005 (0.860)

(2) No IDR 0.021* (0.090) 0.047*** (0.002) 0.015 (0.228) 0.031 (0.204) 0.004 (0.864) -0.053* (0.063)

412 YES YES

278 YES YES

Diff. (p-value) 0.824 0.008*** 0.306 0.043** 0.028** 0.202

All continuous variables are winsorized at 1% and 99%. *** p<0.01, ** p<0.05, * p<0.1

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ACCEPTED MANUSCRIPT Table 8 MLP Distributions, Governance Characteristics, and Firm Value This table reports the results from OLS regressions of firm value on distribution yield, governance characteristics, and a set of controls. The dependent variable, Tobins_q is computed as the ratio of market value of equity plus book value of debt to the book value of assets. Independent variables are defined as in Appendix A.

Predicted sign Tunneling Substitution

VARIABLES

(1) Tobin’s q

(2) Tobin’s q

0.016 (0.865) -0.351 (0.116) 0.646*** (0.009) 0.145 (0.647) -0.215 (0.243) 0.282** (0.029) -0.080 (0.413) -0.241 (0.420)

0.105 (0.395) -0.249 (0.104) 0.691*** (0.004) 0.220 (0.437) -0.090 (0.530) 0.266** (0.036) -0.106 (0.356) -0.221 (0.411)

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0.489 (0.157) FIDUCIARY_WAIVER 0.023 (0.873) MAND_DIST 0.873*** (0.001) ELECT_BOARD 0.260 (0.407) HIGH_CEO_OWN -0.142 (0.390) HIGH_GP_OW N 0.222 (0.147) HIGH_INST_OWN -0.015 (0.910) IDR -0.456 (0.104) HIGH_DIVS * FIDUCIARY_WAIVER + -0.502** (0.038) HIGH_DIVS * MAND_DIST ? ? -0.488* (0.055) HIGH_DIVS * ELECT_ BOA RD + -0.135 (0.584) HIGH_DIVS * HIGH_CEO_OW N + 0.061 (0.758) HIGH_DIVS * HIGH_GP_OWN + 0.097 (0.614) HIGH_DIVS * HIGH_INST_OW N + -0.155 (0.268) HIGH_DIVS * IDR ? ? 0.448* (0.075) SIZE -0.120* -0.147** (0.082) (0.034) LEV -0.302 -0.301 (0.543) (0.525) CAPEX 0.005 0.038 (0.995) (0.962) PPE -0.337 -0.377 (0.376) (0.305) CASH 4.232** 4.333** (0.035) (0.030) ACCRUALS 0.416 0.422 (0.492) (0.444) Observations 766 764 764 Industry & Year Fixed Effects YES YES YES R-squared 0.216 0.340 0.363 All continuous variables are winsorized at 1% and 99%. Robust P-values in parentheses. Standard errors clustered by firm. *** p<0.01, ** p<0.05, * p<0.1

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ACCEPTED MANUSCRIPT Table 9 Effect of MLP Governance and Dividends on Firm Value Firms With Below- and Above-Median Dividend Yield This table reports the results of testing when partitioning the sample by general partner ownership. Panel A reports tests of means of dependent and independent variables for firms with below- and above-median dividend yield. Panel B reports regressions of firm value on governance characteristics, unit ownership elements, and a set of controls (untabulated) for firms with below- and above-median dividend yield. Differences in coefficients in Panel B are computed using Wald chisquare tests. All variables are as defined in App endix A.

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Panel A: Means testing – Below-Median vs. Above-Medi an Dividend Yield BelowAboveDifference Median Median (t-value) TOBINS_Q 1.701 1.660 0.603 DIV_YIELD 0.044 0.135 0.000*** FIDUCIARY_WAIVER 0.442 0.450 0.827 MAND_DIST 0.785 0.866 0.003*** ELECT_BOARD 0.207 0.194 0.652 HIGH_CEO_OWN 0.461 0.539 0.030** HIGH_GP_OW N 0.547 0.453 0.009*** HIGH_INST_OWN 0.524 0.476 0.193 IDR 0.558 0.665 0.002*** SIZE 7.510 7.489 0.844 LEV 0.534 0.580 0.006*** CAPEX 0.077 0.077 0.989 PPE 0.563 0.581 0.373 CASH 0.057 0.041 0.017** ACCRUALS -0.051 -0.068 0.008*** N 382 382

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Panel B: Multivariate analysis – Below-Medi an vs. Above-Median Dividend Yield (1) (2) Difference Below-Medi an Above-Median (p-value) FIDUCIARY_WAIVER -0.042 -0.439*** 0.030** (0.762) (0.009) MAND_DIST 0.897*** 0.144 0.063* (0.000) (0.635) ELECT_BOARD 0.211 0.153 0.765 (0.415) (0.469) HIGH_CEO_OWN -0.246* -0.079 0.241 (0.072) (0.593) HIGH_GP_OW N 0.168 0.311** 0.291 (0.125) (0.018) HIGH_INST_OWN -0.077 -0.077 0.999 (0.508) (0.479) IDR -0.447* 0.239 0.018** (0.052) (0.421) N Controls Industry & Year FE

382 YES YES

382 YES YES

All continuous variables are winsorized at 1% and 99%. *** t<0.01, ** t<0.05, * t<0.1

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ACCEPTED MANUSCRIPT Table 10 MLP Governance Characteristics, Dividend Yield, and the Value of Cash This table reports the results fro m testing the relation among governance quality, dividend payout, and the value of cash. Panel A reports descriptive statistics. Panel B presents results of OLS regressions of excess return on governance characteristics, unit ownership elements, and a set of controls (untabulated). Panel C reports the effects of dividend payout on the value of cash for firms with and without fiduciary waiver provisions. All variables are as defined in Appendix A. Panel A: Descriptive statistics

T

Q1 -0.264 -0.006 0.004 -0.025 -0.011 -0.000 0.002 0.455 1.000

Q3 0.115 0.011 0.057 0.035 0.364 0.010 0.025 0.671 1.340

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N Mean Std. Dev. FFret 719 -0.018 0.467 CHANGE_CASH 719 0.004 0.085 CASH 719 0.103 0.339 CHANGE_EA RN 719 0.022 0.391 CHANGE_NA 719 0.214 0.860 CHANGE_INTEXP 719 0.004 0.024 CHANGE_DIV 719 0.004 0.082 LEV 719 0.560 0.221 NF 719 1.231 0.491 Panel B: Multivariate regression – Governance quality and the value of cash Excess Return VARIABLES (FFret) CHANGE_CASH -0.029 (0.975) FIDUCIARY_WAIVER 0.039 (0.214) MAND_DIST 0.039 (0.415) ELECT_BOARD 0.090** (0.034) CEO_OWN -0.058 (0.606) GP_OWN 0.028 (0.709) INST_OWN -0.234** (0.023) IDR 0.004 (0.917) FIDUCIARY_WAIVER * CHANGE_CASH -1.731** (0.035) MAND_DIST * CHANGE_ CASH 1.702 (0.110) ELECT_BOARD * CHANGE_CASH 0.349 (0.710) CEO_OWN * CHANGE_CASH -0.176 (0.877) GP_OWN * CHANGE_CASH 2.132 (0.218) INST_OWN * CHANGE_CASH -1.123 (0.528) INST_OWN * IDR -0.331 (0.743) Observations 719 R-squared 0.359 Controls & Year & Industry FE YES

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ACCEPTED MANUSCRIPT Panel C: Dividends and the value of cash – MLPs with and without Fiduciary Waiver provisions

GP_OWN INST_OWN IDR HIGH_DIVS HIGH_DIVS * CHANGE_ CASH

AN

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NF Observations R-squared Year & Industry FE

0.997 0.585

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0.312

0.652

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Difference (p-value) 0.700

0.635

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MAND_DIST

No Fiduciary Waiver 0.764*** (0.001) 0.082 (0.193) 0.103 (0.103) 0.048 (0.749) 0.014 (0.898) -0.250* (0.057) 0.021 (0.753) -0.150*** (0.001) 1.167*** (0.009) 0.505*** (0.000) -0.184*** (0.000) 0.106*** (0.001) -0.059 (0.955) -0.020 (0.856) -0.260*** (0.000) 414 0.333 YES

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CHANGE_CASH

Fiduciary Waiver 1.034* (0.067) 0.156 (0.125) 0.103 (0.244) -0.070 (0.718) -0.054 (0.681) -0.160 (0.285) 0.011 (0.865) -0.122** (0.014) -1.890*** (0.009) 1.100*** (0.001) 0.004 (0.928) 0.211*** (0.000) 0.579 (0.567) 0.304** (0.012) -0.223*** (0.000) 305 0.488 YES

0.888 0.651

0.006*** 0.180 0.142 0.155 0.819 0.018** 0.692

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ACCEPTED MANUSCRIPT Table 11 Robustness Tests - Effect of MLP Governance Characteristics on Dividend Yield This table reports the results from regressions of dividend yield on governance characteristics, compensation and unit ownership elements, and a set of controls. Industry and year indicator variables are included in each estimation but are not reported. All other variables are defined in Appendix A. (1) (2) (3) (4) OLS Estimation Energy Only Divs prior 2yrs Divs all years VARIABLES Div. Yield Div. Yield Div. Yield Div. Yield

CEO_OWN GP_OWN INST_OWN

AN

SIZE MB

M

LEV ROA

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FCF CHNG_FCF

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EARN_VOL

IDR

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CAPEX

NEW_EQUITY

Observations Year & Industry FE

-0.000 (0.967) 0.007 (0.523) -0.018* (0.074) 0.025 (0.325) 0.026 (0.210) -0.045* (0.065) -0.005 (0.115) -0.001 (0.139) 0.088*** (0.000) -0.124** (0.010) -0.029 (0.637) -0.036 (0.515) 0.159* (0.057) -0.111*** (0.006) 0.021** (0.030) -0.039 (0.290) 0.001 (0.884)

622 YES

477 YES

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0.009 (0.188) 0.014 (0.200) -0.021** (0.033) 0.024 (0.289) -0.006 (0.726) -0.048** (0.015) -0.005* (0.054) -0.000 (0.636) 0.063*** (0.000) -0.129*** (0.004) -0.070 (0.188) 0.025 (0.607) 0.140 (0.105) -0.077* (0.062) 0.026*** (0.005) -0.027 (0.455) -0.007 (0.280)

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0.015* (0.065) -0.030** (0.044) -0.016 (0.171) -0.082** (0.043) -0.050** (0.022) -0.005 (0.840) 0.000 (0.911) 0.000 (0.661) 0.038* (0.071) -0.141*** (0.008) -0.014 (0.809) 0.031 (0.594) 0.219** (0.035) -0.023 (0.592) 0.007 (0.514) -0.038 (0.287) -0.011 (0.121)

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0.015** (0.034) 0.008 (0.426) 0.010 (0.301) 0.005 (0.795) -0.031* (0.058) -0.034* (0.074) 0.000 (0.847) 0.000 (0.992) 0.050*** (0.003) -0.071* (0.086) -0.065 (0.183) 0.048 (0.277) 0.190** (0.018) -0.054 (0.167) 0.020** (0.027) -0.044 (0.184) -0.008 (0.221)

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FIDUCIARY_WAIVER

690 536 YES YES P-values in parentheses. *** p<0.01, ** p<0.05, * p<0.1

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ACCEPTED MANUSCRIPT HIGHLIGHTS

Governance quality is negatively related to dividend yield



Dividends reduce firm value and value of cash for weakly governed firms



This relation supports the “tunneling” model of dividend determination



Here, the GP extracts resources from the firm through the over-distribution of cash

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