Law Firm Expertise and Shareholder Wealth
45 Pages Posted: 17 Dec 2019
Date Written: December 1, 2019
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 0.98% ($15.09 million), but not that of target firm shareholders. Interestingly, we also find no evidence that the reputation of the investment bank that neither advises the bidder nor the target firm is related to shareholder wealth gains. Our findings are consistent with Krishnan and Masulis (2013), and 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, and by achieving a higher completion probability.
Keywords: Acquisition, Legal Advisory, Law Firm, M&A, Merger Clause, Takeover Premium
JEL Classification: G14, G24, G34
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