The Demand for Corporate Law: Statutory Flexibility, Judicial Quality, or Takeover Protection?

Abstract

This paper provides an empirical examination of the determinants of firms' decisions where to incorporate. Consistent with our theoretical predictions, we find substantial evidence that firms are more likely to incorporate in states with a high-quality judicial system and with corporate law rules that offer firms flexibility to devise their governance arrangement in areas unrelated to takeovers. We find no evidence that firms are more likely to incorporate in states with anti-takeover statutes and only weak evidence that firms avoid states with anti-takeover statutes. The latter results are consistent with the hypothesis that anti-takeover statutes have no significant effect on a company's marginal ability to resist takeovers.