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http://ssrn.com/abstract=2218855
 
 

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Lawyers and Fools: Lawyer-Directors in Public Corporations


Lubomir P. Litov


University of Arizona - Department of Finance; University of Pennsylvania - Wharton Financial Institutions Center

Simone M. Sepe


University of Arizona - James E. Rogers College of Law; IAST - Fondation Jean-Jacques Laffont - TSE

Charles K. Whitehead


Cornell Law School

January 14, 2014

Georgetown Law Journal, Vol. 102
Cornell Legal Studies Research Paper No. 13-63
Arizona Legal Studies Discussion Paper 13-25

Abstract:     
The accepted wisdom — that a lawyer who becomes a corporate director has a fool for a client — is outdated. The benefits of lawyer-directors in today’s world significantly outweigh the costs. Beyond monitoring, they help manage litigation and regulation, as well as structure compensation to align CEO and shareholder interests. The results have been an average 9.5 percent increase in firm value and an almost doubling in the percentage of public companies with lawyer-directors.

This Article is the first to analyze the rise of lawyer-directors. It makes a variety of other empirical contributions, each of which is statistically significant and large in magnitude. First, it explains why the number of lawyer-directors has increased. Among other reasons, businesses subject to greater litigation and regulation, and firms with significant intangible assets (such as patents) value a lawyer-director’s expertise. Second, this Article describes the impact of lawyer-directors on corporate monitoring. Among other results, it shows that lawyer-directors are more likely to favor a board structure and takeover defenses that reduce shareholder value — balanced, however, by the benefits of lawyer-directors, such as the valuable advice they can provide. Finally, this Article analyzes the significant reduction in risk-taking and the increase in firm value that results from having a lawyer on the board.

Our findings fly in the face of requirements that focus on director independence. Our results show that board composition — and the training, skills, and experience that directors bring to managing a business — can be as or more valuable to the firm and its shareholders.

Number of Pages in PDF File: 68

Keywords: corporate governance, board of directors, board composition, lawyer-directors

JEL Classification: D21, G34, K00, K20, K22, L21, L22, M10, M20, M21, M29

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Date posted: February 17, 2013 ; Last revised: January 20, 2014

Suggested Citation

Litov, Lubomir P. and Sepe, Simone M. and Whitehead, Charles K., Lawyers and Fools: Lawyer-Directors in Public Corporations (January 14, 2014). Georgetown Law Journal, Vol. 102; Cornell Legal Studies Research Paper No. 13-63; Arizona Legal Studies Discussion Paper 13-25. Available at SSRN: http://ssrn.com/abstract=2218855 or http://dx.doi.org/10.2139/ssrn.2218855

Contact Information

Lubomir P. Litov
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-3794 (Phone)
University of Pennsylvania - Wharton Financial Institutions Center
2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Simone M. Sepe
University of Arizona - James E. Rogers College of Law ( email )
P.O. Box 210176
Tucson, AZ 85721-0176
United States
IAST - Fondation Jean-Jacques Laffont - TSE ( email )
21 allée de Brienne
31015 Toulouse Cedex 6
Toulouse Cedex, F-31042
France
Charles K. Whitehead (Contact Author)
Cornell Law School ( email )
Myron Taylor Hall
Ithaca, NY 14853
United States
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