Tuesday, October 30, 2012
My Pepperdine friend and colleague Rob Anderson (J.D. 2000, NYU; Ph.D. 2008, Stanford) has joined the law prof blogosphere with Witnesseth: Law, Deals & Data. From Rob's inaugural post, Practice-Ready Scholarship:
In this blog, I hope to create a forum to disseminate practical insights from quantitative legal research on corporate law, capital markets, finance, and mergers & acquisitions. This blog is inspired in part by the last several years’ debate about what law schools should do to produce “practice-ready” law school graduates. Although I see sound arguments on all sides of that debate, I have started this blog based on the conviction that there is a need for law professors, especially in corporate law, corporate finance, and M&A, to devote more resources toward producing practice-ready scholarship.
By “practice-ready scholarship,” I mean scholarly research that has the potential to influence the practical aspects of transactional law practice. Both parts of the term are important. I plan to focus on research that is “practice ready” in the sense that it can have a tangible impact on legal practice at the concrete, rather than merely an abstract or theoretical level. On the other hand I plan to focus on work that is “scholarship” in the sense that it aims to generate new knowledge rather than merely summarizing doctrine or recapitulating existing information. Ultimately, the hope is that this blog will be a small contribution toward bridging the gulf between law schools and lawyers in transactional practices.
In the last couple of years there has been much debate about whether law professors do (or should) produce articles that are useful to practitioners and judges (see here for a good summary). I think reasonable people could disagree about all of these issues, including whether all legal scholarship needs to have a practical application or “point.” But I have started this blog because I don’t think law schools can retain their credibility as professional schools if they focus solely on jousting over normative theory rather than generating positive insights with relatively immediate applications to practice.
I see quantitative academic scholarship as uniquely positioned to provide valuable information to the bench and bar that is otherwise unavailable. I believe that insights from empirical analysis of deals are desperately needed by practitioners. I also believe that law professors have a comparative advantage in performing this empirical analysis because practitioners lack the incentives, time, and inclination to collect, analyze, and report on data for a public audience. Equally important is the existence of a forum to translate these theoretical and empirical insights into terms that can be directly applied by practitioners. The typical transactional lawyer often needs quick answers and cannot persuade clients to pay them to read 60-page law review articles to indulge the lawyer’s intellectual curiosity.
I started this blog with the hope of providing a forum to bridge the gap between scholarly inquiry and practice—especially transactional practice in corporate law, corporate finance, and M&A, where I practiced myself. This blog is designed to communicate useful results from my own original research in progress, as well as commenting on insights from other academics’ research that might otherwise be overlooked by busy practitioners. The goal, overall, is to bring data and theory to practice, without sacrificing either scholarly rigor or practical usefulness.
The plan for the blog is to put together a multiple series of posts, each series loosely organized around a collection of related papers or a data set. Each post is designed to have an independent, practical “take away,” but the entire serial collection will culminate in the overall theoretical or scholarly insight. In the next post, I start a series on the surprising insights into corporate law that can be gleaned with the help of a laptop computer and a hundred thousand or so examples of the humble Form D.
Practitioners and academics have long assumed that the legal terms of acquisition agreements add value to mergers, yet legal scholarship has failed to subject this premise to empirical scrutiny. The conventional wisdom is that markets must value the tremendous amount of time and money that M&A lawyers invest in negotiating and tailoring the legal provisions of acquisition agreements to address the distinctive risks facing each merger. Otherwise, the merging parties would not spend so much on legal fees. But the empirical question remains of whether the legal terms of acquisition agreements add any value beyond the financial terms of mergers (negotiated by investment bankers). For this reason we designed a modified event study of target company stock prices that shows that M&A lawyers’ extensive negotiations on the legal terms of acquisition agreements do not add significant value to mergers. Our analysis of target company stock prices leverages the fact that merger announcements (which lay out the financial terms) are generally disclosed one to four trading days before the disclosure of acquisition agreements (which delineate the legal terms). We focused on a data set of cash-only public company mergers spanning the decade from 2002 to 2011 to ensure that the primary influence on target company stock prices is the expected value of whether a legal condition will prevent the deal from closing. Our analysis shows that there is no economically consequential market reaction to the disclosure of the acquisition agreement. Markets appear to recognize that parties publicly committed to a merger have strong incentives to complete the deal regardless of what legal contingencies are triggered. We argue that the results suggest that M&A lawyers are fixated on the wrong problems by focusing too much on negotiating “contingent closings” that allow clients to call off a deal, rather than “contingent consideration” that compensates clients for closing deals that are less advantageous than expected. This approach can enable M&A lawyers to protect clients against the effects of the clients’ own managerial hubris in pursuing mergers that may (and often do) fall short of expectations.