Market Information and the Elite Law Firm

Abstract

As a subcategory of contract negotiations, corporate transactions present information problems that have not been fully analyzed. In particular, the literature does not address the possibility that parties may simply be unaware of value-increasing transaction terms or their outside option. Such unawareness can arise even for transactions that attract many competing parties, if the bargaining process is such that (1) the price terms are negotiated and fixed prior to the non-price terms, contrary to the standard assumption; and (2) some of the non-price terms remain private for some period of time.

A simple bargaining model shows that, when such unawareness is reasonably probable, each transaction party will maximize its expected payoff by acquiring current market information about non-price transaction terms. Because they have unique access to it, law firms with a significant share of transactional advisory work play an important role in aggregating and selling such market information. The implication is that, absent shocks to transactional practice, the volume advantage of high-market-share law firms should be self-perpetuating. This result is consistent with the observation that the legal advisory market for major corporate transactions is highly concentrated, and that the top firms earn substantial and persistent rents.

Keywords: bargaining, law firm, contract, mergers and acquisitions, asymmetric information

JEL Classification: C72, C78, D44, D82, D83, G34