Earnings management under different ownership and corporate governance structure: A natural experiment with master limited partnerships

Abstract

Master limited partnership (MLP) is a publicly traded partnership run by a general partner (GP) with sole managerial decision-making power, whereas limited partners (LPs) have no role in the operation. As an alternative ownership structure to the traditional corporate ownership, MLPs by law must pay out available cash flow to GPs and LPs. GPs are compensated not by standard stock options but by the distributed cash flow. We find that the MLPs engage in more real activities management than their matching corporations do, but no difference in discretionary accruals management. Since firm characteristic variables do not have a much moderating effect, the difference in governance structures is not the key driver for the behavioral difference, which we attribute to a more quick response by GPs to changes in market conditions. MLPs have higher pressure to generate a consistent stream of earnings and to smooth cash distributions to their unitholders.