Lawyers: Gatekeepers of the sovereign debt market?

- The increased role of lawyers appears to be correlated with crises.
- Over time lawyers develop long term relationships with issuers.
- The rating agencies have stepped in to fill the void left by investment banks.
- The hiring of lawyers correlates with an increase in the cost of capital.
- The weaker the issuer, the greater the need for outside lawyers.

The claim that lawyers act as gatekeepers or certifiers in financial transactions is widely discussed in the legal literature. There has, however, been little empirical examination of the claim. We test the hypothesis that law firms have replaced investment banks as the gatekeepers of the market for sovereign debt. Our results suggest that hiring outside law firms sends a negative signal to the market regarding the pending issuance; a finding that is inconsistent with the thesis that outside law firms primarily play a certification role in the sovereign debt market.