Legal Advisors: Popularity Versus Economic Performance in Acquisitions

Law firms provide extensive intermediation in corporate acquisitions, including negotiation, certification, and drafting of contracts and agreements. Using a broad sample of U.S. acquisition offers, we find that large-market-share law firms are regularly called upon to facilitate completion of large, legally-complex offers. Complex offers are often withdrawn but, controlling for complexity, large-share law firms are associated with enhanced deal completion. Further, we document that some law firms are consistently associated with deal completion over time, and that acquirers with good deal completion experience use fewer different law firms. Acquirers' risk-adjusted returns, though, are smaller around announcements of offers advised by large-share law firms. Post-offer long-run returns of the acquirers' are also lower and often negative following offers advised by large-share law firms. We find no evidence that particular law firms are consistently associated over time with strong returns. Our conclusion is that large law firms enhance deal completion in difficult situations, consistent with the aims of acquirer management. However, we find no systematic evidence that these popular law firms act as gatekeepers in the sense of not wanting to be associated with value-destroying deals.

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