Lawyer Expertise and Contract Design-Evidence from M&A Negotiations

We argue that the relative expertise of contracting parties strongly affects contractual outcomes. Using unique data on company acquisition contracts, we document that lawyers with higher expertise relative to their counterparties negotiate better risk allocation for their clients and more favourable target prices. The benefits of high expertise outweigh its costs, largely because high-expertise lawyers economise on transaction costs by shortening negotiation times. Our findings suggest a need for explicit modelling of contracting skills, and they help explain heterogeneity in legal fees across law firms and the role of league tables of law firms.