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Does the Evidence Favor State Competition in Corporate Law?

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  • Lucian Bebchuk
  • Alma Cohen
  • Allen Ferrell

Abstract

In the ongoing debate on state competition over corporate charters, supporters of state competition have long claimed that the empirical evidence clearly supports their view. This paper suggests that the body of empirical evidence on which supporters of state competition have relied does not warrant this claim. The paper first demonstrates that reported findings of a positive correlation between incorporation in Delaware and increased shareholder wealth are not robust and, furthermore, do not establish causation. The paper then shows that, even if Delaware incorporation were found to cause an increase in shareholder value, this finding would not imply that state competition is working well; benefits to incorporating in the dominant state would likely exist in a race-toward-the bottom' equilibrium in which state competition provided undesirable incentives. Third, the analysis shows that empirical claims that state competition rewards moderation in the provision of antitakeover protections are not well grounded. Finally, we endorse a new approach to the empirical study of the subject that is based on analyzing the determinants of companies' choices of state of incorporation. Recent work based on this approach indicates that, contrary to the beliefs of state competition supporters, states that amass antitakeover statutes are more successful in the incorporation market.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9380.

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Date of creation: Dec 2002
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Publication status: published as Bebchuk, Lucian, Alma Cohen and Allen Ferrell. "Does the Evidence Favor State Competition in Corporate Law?" California Law Review 90, 6 (Dec., 2002): 1775-1821.
Handle: RePEc:nbr:nberwo:9380

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Cited by:
  1. Fidrmuc, Jana P. & Roosenboom, Peter & Paap, Richard & Teunissen, Tim, 2012. "One size does not fit all: Selling firms to private equity versus strategic acquirers," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 828-848.
  2. Luigi Zingales, 2009. "The Future of Securities Regulation," Working Papers 2009.7, Fondazione Eni Enrico Mattei.
  3. Khanna, Tarun & Kogan, Joe & Palepu, Krishna, 2002. "Globalization and Similarities in Corporate Governance: A Cross-Country Analysis," CEI Working Paper Series 2002-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  4. Bebchuk, Lucian Arye & Cohen, Alma, 2002. "Firms' Decisions on Where to Incorporate," CEPR Discussion Papers 3514, C.E.P.R. Discussion Papers.
  5. Oren Bar-Gill & Michal Barzuza & Lucian Bebchuk, 2002. "The Market for Corporate Law," NBER Working Papers 9156, National Bureau of Economic Research, Inc.
  6. : Jana P. Fidrmuc & Peter Roosenboom & Richard Paap & Tim Teunissen, 2012. "One size Does Not Fit All: Selling Firms to Private Equity Versus Strategic Acquirers," Working Papers wpn12-02, Warwick Business School, Finance Group.
  7. Dyreng, Scott D. & Lindsey, Bradley P. & Thornock, Jacob R., 2013. "Exploring the role Delaware plays as a domestic tax haven," Journal of Financial Economics, Elsevier, vol. 108(3), pages 751-772.
  8. Lucian Bebchuk & Alma Cohen, 2002. "Firms' Decisions Where to Incorporate," NBER Working Papers 9107, National Bureau of Economic Research, Inc.
  9. Goergen, Marc & Renneboog, Luc, 2008. "Contractual corporate governance," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 166-182, June.
  10. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.
  11. Amit Sachdeva, 2010. "Regulatory competition in European company law," European Journal of Law and Economics, Springer, vol. 30(2), pages 137-170, October.
  12. Drahozal, Christopher R., 2004. "Regulatory competition and the location of international arbitration proceedings," International Review of Law and Economics, Elsevier, vol. 24(3), pages 371-384, September.

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