The Demise of Investment Banking Partnerships: Theory and Evidence

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The Demise of Investment Banking Partnerships: Theory and Evidence

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Morrison, Alan
Wilhelm Jr, William J

Abstract

Until 1970, the New York Stock Exchange prohibited public incorporation of member firms. After the rules were relaxed to allow joint stock firm membership, investment-banking concerns organized as partnerships or closely-held private corporations went public in waves, with Goldman Sachs (1999) the last of the bulge bracket banks to float. In this paper we ask why the Investment Banks chose to float after 1970, and why they did so in waves. In our model, partnerships have a role in fostering the formation of human capital (Morrison and Wilhelm, 2003). We examine in this context the effect of technological innovations which serve to replace or to undermine the role of the human capitalist and hence we provide a technological theory of the partnership’s going-public decision. We support our theory with a new dataset of investment bank partnership statistics.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4904.

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Date of creation: Feb 2005
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Handle: RePEc:cpr:ceprdp:4904

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Find related papers by JEL classification:
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-06-14 (All new papers)
NEP-FIN-2005-06-14 (Finance)
NEP-HIS-2005-06-14 (Business, Economic & Financial History)

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Joseph Farrell and Suzanne Scotchmer., 1986. "Partnerships," Economics Working Papers 8616, University of California at Berkeley.
Other versions:
- Farrell, Joseph & Scotchmer, Suzanne, 1988. "Partnerships," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 279-97, May. [Downloadable!] (restricted)
William D. Nordhaus, 2001. "The Progress of Computing," Cowles Foundation Discussion Papers 1324, Cowles Foundation, Yale University. [Downloadable!]
Boot, Arnoud W A & Greenbaum, Stuart I & Thakor, Anjan V, 1993. "Reputation and Discretion in Financial Contracting," American Economic Review, American Economic Association, vol. 83(5), pages 1165-83, December. [Downloadable!] (restricted)
Jonathan Levin, 2002. "A Theory of Partnerships," Theory workshop papers 505798000000000002, UCLA Department of Economics. [Downloadable!]
Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
Alan Morrison & William J. Wilhelm, Jr., 2003. "Partnership Firms, Reputation and Human Capital," OFRC Working Papers Series 2003fe02, Oxford Financial Research Centre. [Downloadable!]
Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July. [Downloadable!] (restricted)
Other versions:
- David M Kreps & Robert Wilson, 2003. "Sequential Equilibrium," Levine's Working Paper Archive 618897000000000813, David K. Levine. [Downloadable!]

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