For at least the past decade, U.S. companies have been keenly focused on reducing their expenditures on outside counsel. Many have taken innovative and drastic actions to that end, such as negotiating alternative fee arrangements or making law firms compete for legal work in electronic auctions. Indeed, the conventional view remains that corporate clients are overpaying for legal services. But is that actually the case? One option for reducing legal expenditures is simply to engage a less expensive law firm. Yet surprisingly, there has been little research on whether corporate clients’ choice of law firms is value-maximizing.
In a recent article, Agency Costs in Law-Firm Selection: Are Companies Under-Spending on Counsel? (forthcoming in the Capital Markets Law Journal), I provide evidence suggesting that U.S. public companies may be selecting lower-quality counsel for their transactional work than is warranted. Specifically, using a large sample of syndicated loans, I find that public-company borrowers tend to engage lower-quality law firms than do private equity firms, for the very same types of financing transactions and controlling for key deal characteristics. Admittedly, some of this discrepancy in law-firm choice is likely attributable to value-maximizing behavior by both private equity firms and public companies. Yet it also raises the possibility that agency and other information problems within public companies are distorting their choice of counsel.
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