Lawyer Expertise and Contract Design – Evidence from M&A Negotiations

62 Pages Posted: 13 Mar 2015 Last revised: 26 Aug 2020

See all articles by Christel Karsten

Christel Karsten

Strategy&

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Zacharias Sautner

Frankfurt School of Finance & Management; European Corporate Governance Institute (ECGI)

Date Written: August 25, 2020

Abstract

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

Karsten, Christel and Malmendier, Ulrike and Sautner, Zacharias, Lawyer Expertise and Contract Design – Evidence from M&A Negotiations (August 25, 2020). Available at SSRN: https://ssrn.com/abstract=2576866 or http://dx.doi.org/10.2139/ssrn.2576866

Christel Karsten

Strategy& ( email )

Germany

Ulrike Malmendier

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
(510) 642-8724 (Phone)
(510) 642-6615 (Fax)

HOME PAGE: http://www.econ.berkeley.edu/~ulrike/

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=918

Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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