Certification by financial and legal advisors in private debt markets

Abstract

Theory predicts that certification by prestigious financial intermediaries signals investment quality. We provide a direct empirical test of certification by financial and legal advisors using data on large-scale projects. We find that advisor effects are complementary: financial advisors allow firms to obtain longer loan maturities, while legal advisors (only if prestigious) help firms obtain greater leverage and lower loan spreads. We also document heterogeneity in observables: advisor effects vary across projects based on observable factors. Our results are consistent with firms hiring advisors to help them negotiate better loan agreements by conveying an absence of conflicts of interest.