Does the emergence of publicly traded professional service firms undermine the theory of the professional partnership? A cross-industry historical analysis

Abstract

Economists and organization theorists typically theorize the 'professional partnership' as an advantaged organizational archetype in the knowledge intensive setting of professional services. However, the emergence of publicly traded corporations in some professional services seems to challenge this theory. I identify three alternative interpretations of the existence of publicly traded professional service firms: (1) that they are a mistake, an inefficient choice that does not survive in the long run; (2) that they indicate that some professional service firms face a greater need for or value of capital than conventionally thought; or (3) that their absence stems from strong professional norms rather than any economic disadvantage, and they appear when those norms weaken. To assess the validity of these interpretations, I analyze cross-industry and cross-firm patterns of the emergence and characteristics of public corporations from 1960 to 2003 across five professional services. Although the analysis offers some support for each interpretation, I argue there is an order or precedence among them. Professional norms are the first-order factor: the absence of public corporations in an industry stems primarily from professional norms. The value of capital is second order: where professional norms are not binding, the distribution of public corporations correlates strongly with the relative value of capital and firm size. If the mistake interpretation applies at all, it only applies to small firms. Public ownership appears to be a viable form for large professional service firms, even where the value of capital is low. Overall, the analysis suggests that the core assumption of typical theories of the professional partnership—that it generates advantages in retaining talent or motivating effort—may be flawed.

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