Cornell Law Review Volume 101 Issue 5

The Agency Costs of Teamwork

Transactional lawyers working in corporate finance commonly assume that good teamwork results in better deals. While this may be true, teamwork can also magnify agency costs between issuing companies and the lawyers that serve them. This occurs for at least two reasons. First, teamwork, as it is frequently executed, can discourage dissent by team members even though well-handled disagreement is necessary for optimal outcomes. Second, since all members of the deal team ostensibly serve the issuing company, team cohesion can mask the subtle but significant ways in which the interests of the lawyers and the underwriters diverge from those of the issuers. Whether teamwork’s benefits generally outweigh its costs in capital markets deals is a question with no obvious a priori answer.

This Article presents a theoretical and empirical analysis of agency costs in team dealmaking, using initial public offering (“IPO”) transactions as a case study. The Article finds support for concluding that the tension between a lawyer’s dual role as agent and team member carries little-noticed but significant costs that often offset some of the benefits that come from familiarity between parties in a deal. Drawing on interviews with practitioners and analyzing a unique dataset of 2,265 initial public offering deals, I investigate the potential negative impact of team dynamics in capital markets deals by looking at collaboration between lawyers on both sides of each deal and the investment banks that frequently take companies public. The analysis reveals that while familiarity between the lawyers and bankers in a deal may promote teamwork and lead to faster deal completion times, it is also associated with systematically negative consequences for the issuing companies, such as higher levels of underpricing and a greater likelihood of securities litigation. I analyze the implications of these findings for the law of fiduciary duty, the rules governing lawyers’ ethics, and the norms by which securities deals are executed.

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