The Delaware Trap: An Empirical Study of Incorporation Decisions

Impact of the liability of foreignness, domicile of incorporation and an institutional change on reverse merger firms’ capital-raising performance

“…Thus, we propose that Delaware incorporation has a signaling effect. Delaware's highly developed corporate law and court systems promote the reliability of corporate governance and reduce information asymmetry; thus, more than 50% of public firms in the USA have been incorporated in Delaware (Anderson, 2018;Levy et al, 2018). We argue that RM firms incorporated in Delaware will acquire larger investments than those incorporated in other states, as PIPE investors will anticipate less information asymmetry when target RM firms become incorporated in Delaware.…”

“…In addition, given that state-level corporate laws determine the level of protection for investors in the USA, the choice of state for incorporation has a significant impact on both foreign and US firms' governance (Anderson, 2018). For example, Daines (2001) found that the jurisdictional decision affects a firm's market value.…”

“…For example, Daines (2001) found that the jurisdictional decision affects a firm's market value. Anderson (2018) found that the heterogeneous corporate laws across states lead firms with varying levels of legal sophistication to choose different states as their corporate domicile. It is no wonder that the extent to which a state's corporate law and court system facilitate the reliability of corporate governance (and thereby reduce investors' concern over information asymmetry) would significantly affect those investors' valuation of the firms incorporated in that state.…”