A common complaint is that lawyers provide the "grit" while the I-bankers provide the "grease" when it comes to commercial transactions, especially IPOs. Existing research on lawyers' transactional roles focuses on two alternative perspectives: The skilled advice and the passive execution hypotheses. To test these two competing hypotheses, in a recent paper, Do Lawyers Matter in Initial Public Offerings?, Bates (ASU--Finance) et al. draw from the Thomson Financial Securities Data Company (SDC) new issues database to identify U.S. IPOs over the period of 1986–2016. After filtering, the study's final sample includes data on 7,460 IPOs.
What the paper finds may--or may not--surprise. Specifically, the results imply that issuer law firm fixed effects account for an "economically significant portion of the variation in IPO outcomes, even after accounting for underwriter fixed effects." Specifically, the paper notes that "legal advisor fixed effects explain approximately 16.7% of the variation in IPO underpricing, which is about 70% of the variation attributable to underwriters documented in this and prior studies." Thus, if these effects are real, the paper evidences "the economic importance of legal advisors in the IPO process." The abstract follows.
"This study provides novel evidence that law firms representing issuers have a material impact on economic outcomes in the IPO market. Fixed effects for legal counsel explain a significant portion of the variation in IPO underpricing, comparable to underwriter fixed effects documented in prior studies. Issuer law firms also exhibit differential skill in moderating the likelihood of IPO-related litigation, and have an idiosyncratic influence on the structure of IPO disclosures. Accounting for endogenous selection, we document that law firms associated with lower rates of IPO-related litigation are also associated with less first-day underpricing and receive higher fees from their clients."
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