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Toward a Signaling Explanation of the Private Choice of Corporate Law

  • Edward M. Iacobucci
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    Corporate actors can choose their corporate domicile and have considerable freedom to choose terms in corporate charters. Although contractarian corporate law literature almost always analyzes the private choice of corporate law through the lens of agency costs, this article considers the choice for its informational content. A particular law may be chosen by an entrepreneur not because it reduces agency costs, but because it signals quality to outside investors. The article considers the choice of a Delaware domicile. Higher expected litigation costs for relatively low quality firms that accompany a Delaware domicile could imply that choosing Delaware signals a relatively high quality firm. Alternatively, the size and structure of the franchise tax in Delaware could give rise to a signal of quality from locating there. The article considers the ambiguous welfare implications of the signaling analysis and the debate over mandatory versus enabling rules in corporate law. It also suggests how the signaling analysis might apply to the debate over the private choice of a securities regulation domicile. Copyright 2004, Oxford University Press.

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    Article provided by Oxford University Press in its journal American Law and Economics Review.

    Volume (Year): 6 (2004)
    Issue (Month): 2 ()
    Pages: 319-344

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    Handle: RePEc:oup:amlawe:v:6:y:2004:i:2:p:319-344
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