Agency Costs in Law-Firm Selection: Are Companies Under-Spending on Counsel?
Capital Markets Law Journal (Forthcoming)
29 Pages Posted: 13 Jul 2016
Date Written: June 30, 2016
A growing body of literature examines whether corporate clients derive sufficient value from the law firms that they engage. Yet little attention has been paid to whether clients optimally select among law firms in the first place. One entry-point is to identify discrepancies in the quality of counsel selected by different corporate clients for the very same work. Using a large sample of loans, this Article finds that major U.S. public companies select lower-ranked law firms for their financing transactions than do private equity-owned companies, controlling for various deal characteristics. While some of this discrepancy can be attributed to value-maximizing behavior, agency and other information problems within public companies may distort their choice of counsel. Contrary to the thrust of existing commentary, U.S. public companies may well be spending too little on outside counsel.
Keywords: law firms, agency costs, private equity, public companies
JEL Classification: C21, D82, D83, L84
Suggested Citation: Suggested Citation