Race to the top or bottom? Corporate governance, freedom of reincorporation and competition in law
AbstractThis paper investigates the governance structure choices of firms when there is competition between legal systems. We study the impact of the allocation of control over choice of governance and reincorporation on firmsâ technologies and technological specialization of countries in the context of a model of the firm in which there are agency conflicts between shareholders and managers. We show that the allocation of control over firmsâ reincorporation decisions determines the corporate governance choice ex ante and the outcome of the competition between legal regimes ex post. When managers have control over firmsâ reincorporation then competitive deregulation and âruns to the bottomâ ensue. When shareholders have partial or full control then there is diversity in governance structures. Runs to the bottom are not necessarily socially undesirable but they have a feedback effect on firmsâ choices of technologies that may make the party in control worse off ex ante. We show that it is impossible for any country to achieve social welfare maximization of its existing and new enterprises. With competition between legal regimes, start-up and mature companies incorporate in different jurisdictions even when reincorporation is correctly anticipated.
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Bibliographic InfoArticle provided by Springer in its journal Annals of Finance.
Volume (Year): 1 (2005)
Issue (Month): 4 (October)
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Web page: http://www.springerlink.com/link.asp?id=112370
Corporate governance; Competition between legal systems; Freedom of reincorporation; Shareholder protection; Technology choice; Managerial private benefits; G34; K22;
Other versions of this item:
- Fluck, Zsuzsanna & Mayer, Colin, 2005. "Race to the Top or Bottom? Corporate Governance, Freedom of Reincorporation and Competition in Law," CEPR Discussion Papers 5133, C.E.P.R. Discussion Papers.
- Zsuzsanna Fluck & Colin Mayer, 2005. "Race to the top or bottom? Corporate governance, freedom of reincorporation and competition in law," OFRC Working Papers Series 2005fe07, Oxford Financial Research Centre.
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
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