Does corporate outside counsel better serve shareholders or managers?
Accounting and Management Control
Speaker: Shai Levi (Tel Aviv University)
Although outside legal counsel should owe allegiance to the corporation as a whole, in practice, outside attorneys are claimed to serve managers’ rather than shareholders’ interests. We find evidence consistent with this claim, and show that companies represented by top law-firms have higher earnings management, higher management compensation, more related-party transactions, and lower Tobin’s q. Our results suggest that outside attorneys serve managers, sometimes at the expense of shareholders’ interests. Recent regulation that sought mechanisms to ensure attorneys serve shareholders, has met with fierce opposition from law firms, and was eventually watered down. While such regulation may hurt lawyers, we present a model showing that managers can be better off if regulation will force legal counsels to serve shareholders.