Comparing Agency Costs in Contract Production: Private Equity M&A Versus Corporate and Sovereign Bonds

Abstract

Different areas of transactional practice, such as M&A or high-yield bonds and sovereign bonds, vary in terms of the degree to which they are afflicted by agency problems. In some areas, clients are actively involved in deal making, and in others they are not present until well after the deal is done. If vulnerability to agency problems differs, and these agency problems impact the quality of contract production, one would expect those differences to appear when comparing contract production across practice areas. This Article compares one feature of contract production—the problems of encrusted and sticky boiler-plate—across four different deal types where the degree of agency problems is likely to vary. We find that private equity M&A lawyers, who have the highest degree of client monitoring, innovate in order to repair problems in the deal documents more rapidly than do the other deal types. However, we also find that these private equity M&A contracts have more obsolete and encrusted terms than do corporate or sovereign bonds.

Keywords: boilerplate, agency costs, contractual landmines, sticky contracts

JEL Classification: K12, K22