Law Firm Expertise and Shareholder Wealth

Abstract

This paper examines the impact of law firm expertise on bidder and target shareholder wealth gains during mergers and acquisitions. After controlling for endogeneity in the matching between the mandating firm (bidder or target firm) and the law firm, we find that top-tier law firms increase the wealth of bidder shareholders by an average of 2.00% ($30.80 million) to 3.07% ($47.28 million), but not that of target firm shareholders. Interestingly, we find no evidence that the reputation of the investment bank is related to bidder or target shareholder wealth gains. Our findings suggest that top-tier lawyers are effective “transaction cost engineers.” They create value for their clients by structuring deals to minimize transaction and regulatory costs.

Keywords: Acquisition, Legal Advisory, Law Firm, M&A, Merger Clause, Takeover Premium

JEL Classification: G14, G24, G34