Limited Liability in Investment Banking and Firms' Access to Capital

We study capital raising in the wake of U.S. investment banks transitioning from partnerships to limited-liability forms. Transitioning banks start taking more risk: they underwrite for more uncertain, growth-oriented equity issuers and lower-rated bond issuers. The transition is met with higher IPO underpricing, higher SEO discounts, and more negative SEO announcement returns. Incumbent clients react negatively to news of their bank's reorganization and reduce future capital expenditures, suggesting a devaluation of their underwriting relationships. While risk-taking increases, we find no evidence of weaker screening/due diligence efforts. We conclude that financial intermediary structures shape capital formation with real economic effects.