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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
Fluck, Zsuzsanna
Mayer, Colin

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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 firms’ 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5133.

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Date of creation: Jul 2005
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Handle: RePEc:cpr:ceprdp:5133

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Related research
Keywords: competition between legal systems; corporate governance; freedom or reincorporation; managerial private benefits; shareholder protection; technology choice;

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Find related papers by JEL classification:
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
K22 - Law and Economics - - Regulation and Business Law - - - Corporation and Securities Law

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  4. Baysinger, Barry D & Butler, Henry N, 1985. "The Role of Corporate Law in the Theory of the Firm," Journal of Law & Economics, University of Chicago Press, vol. 28(1), pages 179-91, April.
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    Other versions:
  6. Marco Pagano & Paolo Volpin, 1999. "The Political Economy of Corporate Governance," CSEF Working Papers 29, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jul 2005. [Downloadable!]
    Other versions:
  7. Daines, Robert, 2001. "Does Delaware law improve firm value?," Journal of Financial Economics, Elsevier, vol. 62(3), pages 525-558, December. [Downloadable!] (restricted)
  8. Fluck, Zsuzsanna, 1999. "The Dynamics of the Management-Shareholder Conflict," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(2), pages 379-404.
  9. Romano, Roberta, 1985. "Law as a Product: Some Pieces of the Incorporation Puzzle," Journal of Law, Economics and Organization, Oxford University Press, vol. 1(2), pages 225-83, Fall.
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    Other versions:
  11. Marcel Kahan & Ehud Kamar, 2002. "The Myth of State Competition in Corporate Law," Berkeley Olin Program in Law & Economics, Working Paper Series 1065, Berkeley Olin Program in Law & Economics. [Downloadable!]
  12. 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.
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