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The Market for Corporate Law

Author

Listed:
  • Bar-Gill, Oren
  • Barzuza, Michal
  • Bebchuk, Lucian Arye

Abstract

This Paper develops a model of the competition among states in providing corporate law rules. The analysis provides a full characterization of the equilibrium in this market. Competition among states is shown to produce optimal rules with respect to issues that do not have a substantial effect on managers’ private benefits but not with respect to issues (such as takeover regulation) that substantially affect these private benefits. We analyse why a dominant state such as Delaware can emerge, the prices that the dominant state will set and the profits it will make. We also analyse the roles played by legal infrastructure, network externalities, and the rules governing incorporations. The results of the model are consistent with, and can explain, existing empirical evidence; they also indicate that the performance of state competition cannot be evaluated on the basis of how incorporation in Delaware in the prevailing market equilibrium affects shareholder wealth.

Suggested Citation

  • Bar-Gill, Oren & Barzuza, Michal & Bebchuk, Lucian Arye, 2002. "The Market for Corporate Law," CEPR Discussion Papers 3553, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3553
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    References listed on IDEAS

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    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. Marianne Bertrand & Sendhil Mullainathan, 1999. "Is There a Discretion in Wage Setting? A Test Using Takeover Legislation," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 535-554, Autumn.
    3. Sendhil Mullainathan & Marianne Bertrand, 1998. "Executive Compensation and Incentives: The Impact of Takeover Legislation," Working papers 98-20, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Bebchuk, Lucian Arye & Cohen, Alma, 2003. "Firms' Decisions Where to Incorporate," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 383-425, October.
    5. Bebchuk, Lucian Arye & Cohen, Alma, 2002. "Firms' Decisions on Where to Incorporate," CEPR Discussion Papers 3514, C.E.P.R. Discussion Papers.
    6. Karpoff, Jonathan M. & Malatesta, Paul H., 1989. "The wealth effects of second-generation state takeover legislation," Journal of Financial Economics, Elsevier, vol. 25(2), pages 291-322, December.
    7. Lucian Bebchuk & Oliver Hart, 2001. "Takeover bids vs. Proxy Fights in Contests for Corporate Control," NBER Working Papers 8633, National Bureau of Economic Research, Inc.
    8. Daines, Robert, 2001. "Does Delaware law improve firm value?," Journal of Financial Economics, Elsevier, vol. 62(3), pages 525-558, December.
    9. Roberta Romano, 1998. "Empowering Investors: A Market Approach to Securities Regulation," Yale School of Management Working Papers ysm74, Yale School of Management.
    10. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2002. "Does the Evidence Favor State Competition in Corporate Law?," NBER Working Papers 9380, National Bureau of Economic Research, Inc.
    11. 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 225-283, Fall.
    12. Lucian Arye Bebchuk & Allen Ferrell, 2000. "Federalism and Takeover Law: The Race to Protect Managers from Takeovers," NBER Working Papers 7232, National Bureau of Economic Research, Inc.
    13. Roberta Romano & Sanjai Bhagat, 2001. "Event Studies and the Law: Part II - Empirical Studies of Corporate Law," Yale School of Management Working Papers ysm183, Yale School of Management.
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    Citations

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    Cited by:

    1. Fernando Gómez Pomar & Isabel Sáez Lacave, 2006. "Competition, Inefficiencies, and Dominance in Corporate Law. Comment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(1), pages 161-167, March.
    2. Goergen, Marc & Renneboog, Luc, 2008. "Contractual corporate governance," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 166-182, June.
    3. Sattar A. Mansi & William F. Maxwell & John K. Wald, 2009. "Creditor Protection Laws and the Cost of Debt," Journal of Law and Economics, University of Chicago Press, vol. 52(4), pages 701-717, November.
    4. Brian Broughman & Jesse M. Fried & Darian Ibrahim, 2014. "Delaware Law as Lingua Franca: Theory and Evidence," Journal of Law and Economics, University of Chicago Press, vol. 57(4), pages 865-895.
    5. Becht, Marco & Mayer, Colin & Wagner, Hannes F., 2008. "Where do firms incorporate? Deregulation and the cost of entry," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 241-256, June.
    6. Bebchuk, Lucian Arye & Cohen, Alma, 2003. "Firms' Decisions Where to Incorporate," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 383-425, October.
    7. Lucian A. Bebchuk & Michael S. Weisbach, 2010. "The State of Corporate Governance Research," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 939-961, March.
    8. Dain C. Donelson & Christopher G. Yust, 2014. "Litigation Risk and Agency Costs: Evidence from Nevada Corporate Law," Journal of Law and Economics, University of Chicago Press, vol. 57(3), pages 747-780.
    9. Zsuzsanna Fluck & Colin Mayer, 2005. "Race to the top or bottom? Corporate governance, freedom of reincorporation and competition in law," Annals of Finance, Springer, vol. 1(4), pages 349-378, October.
    10. Fernando Gomez & Juan Ganuza, 2012. "How to build European private law: an economic analysis of the lawmaking and harmonization dimensions in European private law," European Journal of Law and Economics, Springer, vol. 33(3), pages 481-503, June.
    11. Wolfgang Schön, 2006. "The Market for Corporate Law. Comment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(1), pages 168-171, March.
    12. Becht, Marco & Mayer, Colin & Wagner, Hannes, 2006. "Where Do Firms Incorporate?," CEPR Discussion Papers 5875, C.E.P.R. Discussion Papers.
    13. Robert Cooter & Hans Bernd Schäfer, 2011. "The Secret of Growth Is Financing Secrets: Corporate Law and Growth Economics," Journal of Law and Economics, University of Chicago Press, vol. 54(S4), pages 105-123.
    14. Bebchuk, Lucian Arye & Cohen, Alma, 2002. "Firms' Decisions on Where to Incorporate," CEPR Discussion Papers 3514, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    corporate law; Delaware; network externalities; private benefits of control; regulatory competition; shareholders;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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