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Where do firms incorporate? Deregulation and the cost of entry

Author

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  • Marco Becht
  • Colin Mayer
  • Hannes F. Wagner

Abstract

We study how deregulation of corporate law affects the decision of entrepreneurs of where to incorporate. Recent rulings by the European Court of Justice (ECJ) have enabled entrepreneurs to select their country of incorporation independently of their real seat. We analyze foreign incorporations in the U.K., where incorporations of limited liability companies can be arranged at low cost. Using data for over 2 million companies from around the world incorporating in the U.K., we find a large increase in cross-country incorporations from E.U. Member States following the ECJ rulings. In line with regulatory cost theories, incorporations are primarily driven by minimum capital requirements and setup costs in home countries. We record widespread use of special incorporation agents to facilitate legal mobility across countries.
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Suggested Citation

  • Marco Becht & Colin Mayer & Hannes F. Wagner, 2008. "Where do firms incorporate? Deregulation and the cost of entry," ULB Institutional Repository 2013/13306, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:ulb:ulbeco:2013/13306
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    References listed on IDEAS

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    1. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2002. "The Regulation of Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 1-37.
    2. Kahan, Marcel & Kamar, Ehud, 2002. "The Myth of State Competition in Corporate Law," Berkeley Olin Program in Law & Economics, Working Paper Series qt3xq7p9xw, Berkeley Olin Program in Law & Economics.
    3. Oren Bar-Gill & Michal Barzuza & Lucian Bebchuk, 2006. "The Market for Corporate Law," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(1), pages 134-160, March.
    4. Guhan Subramanian, 2004. "The Disappearing Delaware Effect," Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 32-59, April.
    5. repec:hrv:faseco:30747190 is not listed on IDEAS
    6. Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May.
    7. Daines, Robert, 2001. "Does Delaware law improve firm value?," Journal of Financial Economics, Elsevier, vol. 62(3), pages 525-558, December.
    8. Roberta Romano, 1998. "Empowering Investors: A Market Approach to Securities Regulation," Yale School of Management Working Papers ysm74, Yale School of Management.
    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 225-283, Fall.
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    Citations

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    Cited by:

    1. Christa Hainz & Lars Hornuf & Lars Klöhn & Björn Brauer & Felix Ehrenfried & Gerrit Engelmann, 2017. "Praxiserfahrungen mit den Befreiungsvorschriften des Kleinanlegerschutzgesetzes," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 78.
    2. Eidenmüller, Horst & Engert, Andreas & Hornuf, Lars, 2015. "Where do firms issue debt? An empirical analysis of issuer location and regulatory competition in Europe," International Review of Law and Economics, Elsevier, vol. 41(C), pages 103-115.
    3. Luc Renneboog & Peter G. Szilagyi & Cara Vansteenkiste, 2017. "Creditor rights, claims enforcement, and bond performance in mergers and acquisitions," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(2), pages 174-194, February.
    4. repec:prg:jnlpol:v:2017:y:2017:i:3:id:1144:p:287-300 is not listed on IDEAS
    5. Divanbeigi,Raian & Ramalho,Rita, 2015. "Business regulations and growth," Policy Research Working Paper Series 7299, The World Bank.
    6. Goergen, Marc & Renneboog, Luc, 2008. "Contractual corporate governance," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 166-182, June.
    7. Susanne Prantl & Frederik Thenée, 2017. "Incorporation Decisions and Job Creation in New Firms," Working Paper Series in Economics 91, University of Cologne, Department of Economics.
    8. Jodie A. Kirshner, 2009. "A Third Way: Regional Restructuring and the Societas Europaea," Working Papers wp385, Centre for Business Research, University of Cambridge.
    9. repec:eee:riibaf:v:42:y:2017:i:c:p:1315-1326 is not listed on IDEAS
    10. Djankov, Simeon, 2008. "The Regulation of Entry: A Survey," CEPR Discussion Papers 7080, C.E.P.R. Discussion Papers.
    11. Chris Mallin & Kean Ow-Yong, 2010. "The UK Alternative Investment Market – Ethical Dimensions," Journal of Business Ethics, Springer, vol. 95(2), pages 223-239, September.
    12. Lars Hornuf, 2015. "Barbara Gabor: Regulatory competition in the internal market: comparing models for corporate law, securities law and competition law," European Journal of Law and Economics, Springer, vol. 40(1), pages 179-182, August.
    13. 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.
    14. Andrea Zorzi, 2016. "A European Nevada? Bad Enforcement As an Edge in State Competition for Incorporations," Working Papers 2016:12, Department of Economics, University of Venice "Ca' Foscari".
    15. Loureiro, Gilberto, 2010. "The reputation of underwriters: A test of the bonding hypothesis," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 516-532, September.

    More about this item

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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