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Race to the top or bottom? Corporate governance, freedom of reincorporation and competition in law

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  • Zsuzsanna Fluck

    ()

  • Colin Mayer

    ()

Abstract

This 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 firms` 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 firms` 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 reincorporation then competitive deregulation and runs to the bottom 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 firms` 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 Info

Article provided by Springer in its journal Annals of Finance.

Volume (Year): 1 (2005)
Issue (Month): 4 (October)
Pages: 349-378

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Handle: RePEc:kap:annfin:v:1:y:2005:i:4:p:349-378

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Web page: http://www.springerlink.com/link.asp?id=112370

Related research

Keywords: Corporate governance; Competition between legal systems; Freedom of reincorporation; Shareholder protection; Technology choice; Managerial private benefits; G34; K22;

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References

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  1. Black, Bernard S. & Gilson, Ronald J., 1998. "Venture capital and the structure of capital markets: banks versus stock markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 47(3), pages 243-277, March.
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  10. Kahan, Marcel & Kamar, Ehud, 2002. "The Myth of State Competition in Corporate Law," Berkeley Olin Program in Law & Economics, Working Paper Series, Berkeley Olin Program in Law & Economics qt3xq7p9xw, Berkeley Olin Program in Law & Economics.
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  12. Baysinger, Barry D & Butler, Henry N, 1985. "The Role of Corporate Law in the Theory of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 28(1), pages 179-91, April.
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Cited by:
  1. Deffains, Bruno & Demougin, Dominique, 2008. "Legal competition, political process and irreversible investment decisions," European Journal of Political Economy, Elsevier, vol. 24(3), pages 615-627, September.
  2. Goergen, M. & Renneboog, L.D.R., 2008. "Contractual Corporate Governance," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2008-015, Tilburg University, Tilburg Law and Economic Center.
  3. Becht, Marco & Mayer, Colin & Wagner, Hannes, 2006. "Where Do Firms Incorporate?," CEPR Discussion Papers 5875, C.E.P.R. Discussion Papers.
  4. Bruno Deffains & Dominique Demougin, 2006. "Institutional Competition, Political Process and Holdup," SFB 649 Discussion Papers SFB649DP2006-027, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Rui Albuquerque & Jianjun Miao, 2013. "CEO Power, Compensation, and Governance," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 443-479, November.
  6. repec:cuf:journl:y:2013:v:14:i:1:n:2:albuquerque is not listed on IDEAS

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