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

Author

Listed:
  • Colin Mayer
  • Zsuzsanna Fluck
  • Department of Finance
  • Michigan State University

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.

Suggested Citation

  • Colin Mayer & Zsuzsanna Fluck & Department of Finance & Michigan State University, 2005. "Race to the top or bottom? Corporate governance, freedom of reincorporation and competition in law," Economics Series Working Papers 2005-FE-07, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:2005-fe-07
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    File URL: https://ora.ox.ac.uk/objects/uuid:76578042-9799-4812-b736-620b57f380f6
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    Citations

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    Cited by:

    1. Kuznetsov, Andrei & Jacob, Marcus, 2015. "Institutional adjustment and change at the firm level: A varieties of capitalism perspective," Scandinavian Journal of Management, Elsevier, vol. 31(2), pages 165-177.
    2. Goergen, Marc & Renneboog, Luc, 2008. "Contractual corporate governance," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 166-182, June.
    3. Nedelchev, Miroslav, 2010. "Корпоративно Управление На Финансови Групи (Спазвай И Обяснявай) [Corporate Governance of Financial Groups (Comply and Explain)]," MPRA Paper 52249, University Library of Munich, Germany.
    4. Rui Albuquerque & Jianjun Miao, 2013. "CEO Power, Compensation, and Governance," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 443-479, November.
    5. Mayer, Colin & Becht, Marco & Wagner, Hannes, 2006. "Where Do Firms Incorporate?," CEPR Discussion Papers 5875, C.E.P.R. Discussion Papers.
    6. Gerner-Beuerle, Carsten & Mucciarelli, Federico M. & Schuster, Edmund & Siems, Mathias, 2018. "Why do businesses incorporate in other EU Member States? An empirical analysis of the role of conflict of laws rules," International Review of Law and Economics, Elsevier, vol. 56(C), pages 14-27.
    7. repec:hum:wpaper:sfb649dp2006-027 is not listed on IDEAS
    8. Deffains, Bruno & Demougin, Dominique M., 2006. "Institutional competition, political process and holdup," SFB 649 Discussion Papers 2006-027, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    9. repec:cuf:journl:y:2013:v:14:i:1:n:2:albuquerque is not listed on IDEAS
    10. Deffains, Bruno & Demougin, Dominique, 2008. "Legal competition, political process and irreversible investment decisions," European Journal of Political Economy, Elsevier, vol. 24(3), pages 615-627, September.
    11. Njoya, W., 2010. "Employee Ownership in the European Company: Reflexive Law, Reincorporation and Escaping Codetermination," Working Papers wp416, Centre for Business Research, University of Cambridge.

    More about this item

    Keywords

    Corporate Governance; Shareholder Protection; Technology Choice;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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