Agency Costs in Law-Firm Selection: Are Companies Under-Spending on Counsel?

Capital Markets Law Journal (Forthcoming)

Duke Law School Public Law & Legal Theory Series No. 2016-44

29 Pages Posted: 13 Jul 2016

Date Written: June 30, 2016

Abstract

A growing body of literature examines whether corporate clients derive sufficient value from the law firms that they engage. Yet little attention has been paid to whether clients optimally select among law firms in the first place. One entry-point is to identify discrepancies in the quality of counsel selected by different corporate clients for the very same work. Using a large sample of loans, this Article finds that major U.S. public companies select lower-ranked law firms for their financing transactions than do private equity-owned companies, controlling for various deal characteristics. While some of this discrepancy can be attributed to value-maximizing behavior, agency and other information problems within public companies may distort their choice of counsel. Contrary to the thrust of existing commentary, U.S. public companies may well be spending too little on outside counsel.

Keywords: law firms, agency costs, private equity, public companies

JEL Classification: C21, D82, D83, L84

Suggested Citation

de Fontenay, Elisabeth, Agency Costs in Law-Firm Selection: Are Companies Under-Spending on Counsel? (June 30, 2016). Capital Markets Law Journal (Forthcoming); Duke Law School Public Law & Legal Theory Series No. 2016-44. Available at SSRN: https://ssrn.com/abstract=2808707 or http://dx.doi.org/10.2139/ssrn.2808707

Elisabeth De Fontenay (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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