Law Firm Reputation and Mergers and Acquisitions

In this paper, Law Firm Reputation and Mergers and Acquisitions, which was recently made publicly available on SSRN and presented at the 4th Annual Conference on Empirical Legal Studies 2009, my co-author, C.N.V. Krishnan of Case Western Reserve University, and I document the influence that top law firms have on M&A offer outcomes.

Using a comprehensive sample of M&A offers over 1990-2008, we show that more reputable law firms have significant relationships to M&A offer outcomes, even after controlling for offer, bidder and investment bank characteristics. Top bidder legal advisors are associated with significantly higher deal completion rates than other legal advisors. In contrast, top target legal advisors are associated with significantly higher deal withdrawal rates than other legal advisors. Top bidder and target law firms are both associated with significantly higher takeover premia in completed deals than less prominent law firms.

Our interpretation is that top bidder law firms have the incentive to complete deals even in the face of higher takeover premia, while top target law firms have the incentive to obtain higher takeover premia. These offer outcomes appear to be associated with certain offer characteristics that law firms can influence: (a) the incidence of target termination fee provisions, which are significantly associated with both top bidder and target legal advisors and (b) tender offers, which top bidder legal advisors are significantly associated with compared to less prominent legal advisors. Bidder announcement period stock price reactions are significantly more negative for offers involving a top bidder or target legal advisor. Interestingly, we do not find evidence to suggest that bidder announcement effects significantly influence deal completion rates; but top M&A law firms do.

To our knowledge, this is the first study to carefully document the association of law firm reputation with M&A transactions and outcomes. Considering the fact that M&A transactions almost always involve both investment banks and law firms, our study shows that research on M&A deal outcomes could be subject to important omitted-variable biases if the potentially important role of law firms is not taken into account.

The full paper is available for download here.