Traditionally, Wall Street investment banks had been organized as partnerships, but by 2000 they had converted to being publicly traded companies.As partnerships, the principal-agent problem is ________ because there is ________ separation of ownership from control.

Question

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When investment banks were partnerships, the principal-agent problem was reduced because there was little separation of ownership from control. This means that the partners who owned the firm were also the ones making decisions and managing the firm. They had a personal stake in the success of the firm and were more likely to act in the best interest of the firm as a result. However, once the investment banks converted to publicly traded companies, the principal-agent problem increased because there was much separation of ownership from control. The shareholders who owned the firm were no longer the ones making decisions and managing the firm. Instead, they delegated that responsibility to managers who may not have had the same personal stake in the success of the firm, leading to potential conflicts of interest.

Traditionally, Wall Street Investment Banks Had Been Organized as Partnerships