Financing professional partnerships

Increases in net-debt obligations of profit sharing partnerships give these organizations a strong incentive to expand. This paper argues that when capital structure is transparent, partnerships can signal their hiring intentions to uninformed clients by their net-debt levels. Levin and Tadelis (2005) predicts that professional service firms with fewer informed clients will tend to choose to organize as partnerships rather than corporations. The present paper demonstrates that this prediction only holds when financial frictions are present.