Does Legal Counsel Expertise Add Value? Evidence from Mergers and Acquisitions

Sandy Klasa, Lubomir P. Litov, Jordan Neyland and Simone M. Sepe
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Sandy Klasa: University of Arizona
Lubomir P. Litov: University of Arizona and University of Pennsylvania
Jordan Neyland: University of Melbourne
Simone M. Sepe: University of Arizona and Toulouse School of Economics

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: We examine the role of legal counsel expertise in mergers and acquisitions. Using data for public target acquisitions from 1990 through 2010, we find that legal counsel with expertise in ERISA litigation, corporate law, or the acquirer's industry as well as high overall expertise in league tables are associated with lower acquisition premia, lower completion rates, higher acquirer announcement returns, and higher post-acquisition accounting performance. These effects appear to increase over time as deals become more complex and to be stronger for targets with greater earnings management, lower analyst coverage, higher idiosyncratic volatility, or greater indebtedness. Our results are robust to controls for the potential endogeneity of the legal counsel choice, addressed through instrumental variables analysis. Taken together, these results suggest an important economic role of legal counsel expertise in mergers and acquisitions.

Date: 2013-07
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