The Optimal Size, Financing and Personal Liability of Professional Partnerships

The Optimal Size, Financing and Personal Liability of Professional Partnerships, Prof. Bart Lambrecht

Abstract

The current study shows that equity capital is a professional partnership's preferred source of financing. Capital-constrained partners determine the partnership's size and financing by trading off the cost from recruiting equity partners who dilute average profits against the expected liquidation and bankruptcy costs from issuing debt. Weakly capital-constrained partners register as a General Partnership with debt secured by partners' personal assets. Severely capital-constrained partners register as a Limited Liability Partnership with risky debt. The optimal partner mix equalizes marginal productivity per share between senior and junior equity partners. A two-tier partnership structure levers up equity partners' value per share.

About the speaker

Professor Lambrecht is a Research Fellow of the CEPR . He is an Editor of the Journal of Business Finance and Accounting, and an Associate Editor of the Journal of Banking and Finance. He is a former Editor of the Journal of Corporate Finance, and a former Associate Editor of the Review of Finance and of Financial Management. He is also a member of the Cambridge Finance Management Board, of the advisory board of the Cambridge INET Institute, and of the Cambridge Corporate Governance Network.