Regulatory Competition and the Market for Corporate Law

Abstract

This article develops an empirical model of firms' choice of corporate laws under inertia. Delaware dominates the incorporation market, though recently Nevada, a state whose laws are highly protective of managers, has acquired a sizable market share. Using a novel database of incorporation decisions from 1995-2013, we show that most firms dislike protectionist laws, such as anti-takeover statutes and liability protections for officers, and that Nevada's rise is due to the preferences of small firms. Our estimates indicate that despite inertia, Delaware would lose significant market share and revenues if it adopted protectionist laws. Our findings support the hypothesis that Delaware faces competitive pressure to maintain its current laws, and that managers are willing to commit to such laws in order to attract capital.

Network Effects in Corporate Governance

“…A large literature studies the causes and effects of governance decisions, and specifically the incorporation decision. On causes, previous work has studied the influence of firm size (Dammann and Schündeln, 2009), the identity of investors (Broughman, Fried and Ibrahim, 2014), and the enactment of antitakeover statutes (Subramanian, 2002;Bebchuk and Cohen, 2003;Eldar and Magnolfi, 2017), though recent scholarship has questioned the salience of the latter on firm outcomes (Catan and Kahan, 2016;Cain, McKeon and Solomon, 2017). On effects, several papers have studied the effect of antitakeover statues on firm value (Cremers and Ferrell, 2014) as well as the effect of Delaware incorporation on firm value (Daines, 2001;Bhagat and Romano, 2002;Subramanian, 2004).…”