Lawyer Expertise and Contract Design – Evidence from M&A Negotiations
62 Pages Posted: 13 Mar 2015 Last revised: 26 Aug 2020
Date Written: August 25, 2020
Contract theory largely abstracts from individual differences in the ability to design contracts. We argue that the relative expertise of contracting parties strongly affects contractual outcomes. Using unique data on company acquisition contracts, we document that lawyers with higher expertise relative to their counterparties negotiate better risk allocation for their clients and more favorable target prices, after controlling for the deal environment, the quality of financial advisors, and other features of the contract design. We address concerns about endogenous assignment in fixed-effects analyses and by exploiting frictions that prevent switching. The benefits of high expertise appear to outweigh its costs, largely because high-expertise lawyers economize on transaction costs by shortening negotiation times. Our findings challenge the standard paradigm of optimal contracts, and suggest a need for explicit modeling of contracting skills. They also helps explain heterogeneity in legal fees across law firms and the role of league tables of law firms.
Keywords: Contracting; M&A, Lawyers
JEL Classification: G34; K12
Suggested Citation: Suggested Citation