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Are star lawyers also better lawyers?

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We study the performance of dominant law firms (“stars”) in litigation brought against publicly traded corporations. We use insurance coverage as a benchmark for expected settlement amounts, to separate to what extent (a) stars reach more favorable settlements on any lawsuit (a performance or treatment effect) or (b) stars are retained in lawsuits where a favorable settlement is ex ante more likely (a selection effect). Our findings indicate the latter, and that star firms have an economically small impact on settlement amounts. This result is not explained by measurement error or over-/under-insurance. The extent to which stars are associated with improvements in corporate governance also appears limited. The stars’ large market share and the high fees they earn may be justified by their ability to reduce uncertainty about the lawsuit outcome or by frictions, such as aggressive marketing and limited client sophistication and bargaining power, which limits the stars’ clients’ ability to turn to other law firms.

This talk is part of the Cambridge Finance Workshop Series series.

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