DP4904 The Demise of Investment Banking Partnerships: Theory and Evidence

Author(s): Alan Morrison, William J Wilhelm Jr
Publication Date: February 2005
Keyword(s): collective reputation, going-public decision, human capital, investment bank, partnership
JEL(s): G24, G32, J24, J41, L14, L22
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4904

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.