DP14936 Lawyer Expertise and Contract Design ?? Evidence from M&A Negotiations

Author(s): Christel Karsten, Ulrike M. Malmendier, Zacharias Sautner
Publication Date: June 2020
Date Revised: July 2020
JEL(s): D86, G34, K12
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14936

Using unique data on company acquisition contracts, we document significant variation in contracts depending on the expertise of the negotiating parties. Lawyers with higher expertise relative to their counterparties negotiate better risk allocation for their clients and more favorable target prices, after controlling for the deal environment, the quality of financial advisors, and other features of the contract design. The benefits of high expertise appear to outweigh its costs, largely because high-expertise lawyers economize on transaction costs by shortening negotiation times. Our findings help explain the importance of league tables and variation in legal fees in the M&A industry.