Litigators, Midsize Firms / Regional Firms, Money

Finance And Law: The Shrinking Legal Market

The number of publicly traded companies is declining; what does this mean for lawyers and law firms?

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down chart graph decline fall stock market dip recessionClass action suits against publicly traded companies are a major source of revenue for many large law firms. Whether defending or attacking, big companies are the major source of revenue for many large law firms. But the number of big companies is shrinking, and that means that the number of big law firms may have to shrink as well.

The number of publicly traded companies in the United States peaked in 1997 at just under 10,000 firms. Since that time, the size of the stock market has declined consistently when measured by number of traded companies (though not when measured by total market capitalization). Today there are roughly 6,500 publicly traded firms. That decline has been driven by a number of factors – bankruptcies around the dotcom bubble and the 2008 recession, companies that went private after the Sarbenes-Oxley Act was passed, publicly traded companies being bought out by private equity firms, increased mergers by larger firms, and a decreased propensity for firms to go public in new IPOs.

The end result of this confluence of trends is that there are fewer large publicly traded companies today. However, the companies that do remain are much larger today on average than the typical publicly traded company was a decade ago.

So why does all of this matter to lawyers? The answer is that it creates fewer potential clients. Landing an account with a large company today is more lucrative and will involve more work, but there are fewer such accounts to go around. As a result, this means fewer clients for the typical law firm (even if billings have grown). What’s more, given the increasing concentration in the stock market, it is likely that accounts are being concentrated with a smaller subset of very large law firms.

The result is that it’s probably harder today to be a mid-sized or moderately large law firm than it used to be. And that trend is unlikely to reverse. Given that trend, it’s also likely that the legal industry will become more bifurcated over time – a hundred or so very large law firms and many small law firms, with few midsized firms in the middle. That structure has important implications for the profitability of a legal career in the future.

In addition, the changing structure of the stock market makes many kinds of class action cases more difficult. Take M&A class action cases, for instance – there are a handful of prominent M&A litigation firms that specialize in challenging the prices paid by acquiring companies for target firms. Faruqi & Faruqi LLP, Grant & Eisenhofer PA, and Prickett, Jones & Elliott PA all have done work in this area, for instance.

As the number of publicly traded firms shrinks, the potential bidder pool for a particular stock shrinks as well. That makes it more difficult for a target company to attract additional bids and makes it more difficult for attorneys to argue that a go-shop effort was not done to a reasonable standard. In turn, attorneys at these practices may be forced to begin relying more on statistical techniques to prove the adequacy or inadequacy of a particular offer.

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Michael McDonald is an assistant professor of finance at Fairfield University in Connecticut. He holds a PhD in finance. Michael consults extensively with organizations ranging from Fortune 500 companies to start-up businesses on financial matters through Morning Investments Consulting. Michael has served as an expert witness in legal disputes, and is an arbitrator with the Financial Industry National Regulatory Authority (FINRA). Michael can be reached at M.McDonald@MorningInvestmentsCT.com.

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