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

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Author Info

  • 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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File URL: http://hdl.handle.net/10.1007/s10436-005-0022-y
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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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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lucian Arye Bebchuk & Allen Ferrell, 2001. "A New Approach to Takeover Law and Regulatory Competition," NBER Working Papers 8148, National Bureau of Economic Research, Inc.
  2. Oren Bar-Gill & Michal Barzuza & Lucian Bebchuk, 2002. "The Market for Corporate Law," NBER Working Papers 9156, National Bureau of Economic Research, Inc.
  3. repec:cdl:oplwec:75 is not listed on IDEAS
  4. Marco Pagano & Ailsa A. Röell & Josef Zechner, 2002. "The Geography of Equity Listing: Why Do Companies List Abroad?," Journal of Finance, American Finance Association, vol. 57(6), pages 2651-2694, December.
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  9. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 693-728, August.
  10. Kahan, Marcel & Kamar, Ehud, 2002. "The Myth of State Competition in Corporate Law," Berkeley Olin Program in Law & Economics, Working Paper Series qt3xq7p9xw, Berkeley Olin Program in Law & Economics.
  11. 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.
  12. William A. Reese, Jr. & Michael S. Weisbach, 2001. "Protection of Minority Shareholder Interests, Cross-listings in the United States, and Subsequent Equity Offerings," NBER Working Papers 8164, National Bureau of Economic Research, Inc.
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Cited by:
  1. Bruno Deffains & Dominique Demougin, 2006. "Institutional Competition, Political Process and Holdup," SFB 649 Discussion Papers SFB649DP2006-027, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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