The Sum of Its Parts: The Lawyer-Client Relationship in Initial Public Offerings
66 Pages Posted: 13 Jan 2017
Date Written: October 4, 2015
Abstract
A question often posed of the legal profession is what (if any) value lawyers add to the endeavors of their clients. However, this framing of the question ignores the fact that lawyers do not add value in a vacuum, but only through effective collaboration with their clients. This Article therefore addresses the question of lawyers' value by examining the working relationship between a lawyer and his or her client. As a lens I analyze one of the most important types of capital markets deals in a company’s existence: its initial public offering (IPO) of company stock. Drawing on data from interviews with equity capital markets lawyers at major law firms, and analyzing data from IPOs in the United States registered with the Securities and Exchange Commission between June 1996 and December 2010, this study finds a strong association between several measures of IPO performance and the familiarity between the lead underwriter and its counsel, as measured by the number of times a particular law firm serves as counsel to a managing underwriter within a relatively short time period. Performance is gauged according to a stock’s opening day returns, price performance over thirty, sixty, and ninety trading days, correct price revision, litigation rates, and the speed at which deals are completed. I also analyze the relationships between the lawyers for the lead underwriter and the lawyers for the issuer. The analysis shows some benefits from familiarity, albeit generally smaller than those associated with the underwriter-lawyer relationship. In all cases, the positive effects of repeated interaction diminish the further back in time the previous collaborations occurred. I also show that the relationships between familiarity and deal quality occur independently of the level of the lawyers’ experience.
These findings support the conclusion that lawyers’ relational skill can positively influence deal outcomes, independent even of substance and process knowledge. I hypothesize that the core advantage of repeated interaction is the formation of more effective lawyer-client team dynamics.
Keywords: Securities, IPO, Law Firms, Lawyers
JEL Classification: G30, K22
Suggested Citation: Suggested Citation