Regulatory Competition and the Market for Corporate Law (with Ofer Eldar)
U.S. firms can choose the corporate governance laws that apply to them through incorporation decisions, and states compete to attract firms. Delaware dominates the market for incorporations, though recently Nevada, a state with laws that strongly protect managers, has acquired a sizable share of this market. To address the debate on the desirability of competition for corporate charters, we develop an empirical model of firms’ choice of corporate governance laws based on a set of legal and firm characteristics, and where firms’ choices are subject to inertia in decision making. We estimate the model using panel data on states’ laws, and a novel database that accurately tracks incorporation decisions for all U.S. public firms from 1995 through 2013.
Our study reveals that even though there were relatively small shifts in market shares and few reincorporations in this period, states’ corporate laws have a significant effect on firm incorporation decisions. Although it is impossible for states to compete with Delaware by copying its laws without replicating its judicial system, there is elasticity in the demand for corporate laws, which is concealed by inertia. Contrary to the “race to the bottom” view of this market, we show that large corporations dislike laws that afford greater protection to managers, particularly anti-takeover statutes and provisions that exempt officers from liability. Our counterfactual analysis suggests that Delaware could lose significant market share and revenues if it were to adopt such laws.