Elite Law Firm Mergers and Reputational Competition: Is Bigger Really Better? An International Comparison
Bruce E. Aronson
Hitotsubashi University Graduate School of International Corporate Strategy
Vanderbilt Journal of Transnational Law, Spring 2007
Although rapid law firm growth has been with us since the 1980s, the acceleration of this trend over the last decade by means of mergers is puzzling. Why would normally conservative law firms embark on a merger strategy which appears to encompass significant risk and uncertain benefits? And is this trend a peculiarly American (or Anglo-American) phenomenon?
Most of the popular explanations for law firm mergers focus on a single factor; law firms everywhere cite strikingly similar reasons based on a presumed client demand for "one-stop shopping." This article contributes to providing a more robust, multi-causal explanation for law firm behavior through a comparative study of reputational competition among elite law firms in selected jurisdictions - the U.S., U.K., Germany, Australia and Japan. It posits that industry consolidation and changing market conditions have intensified law firm competition, and that since firm quality is hard to measure law firms compete largely on the basis of reputation. Many law firms are thus paradoxically driven to engage in (defensive) mergers to meet the competition due to their risk averse nature and the fear of losing existing clients.
The study considers circumstances which are likely to lead to mergers through an examination of reputational competition, particularly the elements of reputational signaling, herd behavior and reputational status as "first-tier" law firms. It identifies "rules of the game" for firm behavior with respect to international mergers. It finds that the impact of a strategic decision, such as a merger, by a first-tier firm is of far greater significance than a similar action by another elite firm; it is much more likely to lead to defensive actions, such as mergers, by competitor firms. Thus, which firms engage in merger activity in a given market is an important factor in explaining and predicting both the reaction of competitors and whether mergers will become widespread in that market.
This study further suggests that the common phenomenon of law firm mergers is likely a result of law firms reacting to similar types of changes in their operating environment (i.e., a parallel development), rather than convergence to an "Anglo-American" model of the law firm.
Number of Pages in PDF File: 83
Keywords: law firm, merger, international, comparative
JEL Classification: K33
Date posted: May 10, 2007 ; Last revised: August 13, 2008