Document Type

Article

Publication Date

2005

Abstract

In this Article, the author analyzes the reactions of 147 New York City law firms to the 1994 enactment of the New York Limited Liability Partnership statute, which provided New York law firm partners with the first convenient mechanism to limit their personal liability for partnership debts. Using both quantitative and qualitative evidence, she evaluates whether the behavior of New York law firms supports the signaling theory of organizational form - that is, the theory that firms use the partnership form to signal to the marketplace that they provide high quality legal services, due to either superior monitoring or to profit sharing. She concludes that the quantitative data do not strongly support either signaling theory of partnership. In addition, both theories face substantial theoretical hurdles. At the same time, interviews with law firm partners suggest that signaling concerns did impact law firm choice of form, in some cases profoundly. The author proposes three modifications to the signaling theory of organizational form that render the theory both more theoretically persuasive and more consistent with the observed behavior of law firms. First, the relevant signal appears to be negative, rather than positive. Second, this negative signal is more costly to elite firms than to non-elite firms. Third, firms may attempt to signal something other than, or in addition to, quality through their choice of organizational form - namely, status.

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