Delaware Incorporation and Involuntary CEO Turnover

Abstract:     
Critics have charged that state competition in corporate law, which Delaware dominates, leads to a “race to the bottom” making management unaccountable. We test this hypothesis using forced CEO turnover as our metric of management accountability. We compare California firms that choose to incorporate in California – the state with arguably the most restrictive corporate law rules – with those that incorporate in Delaware. We postulate and document that aspects of Delaware law attract firms that plan to grow through merger or acquisition and are vulnerable to shareholder lawsuits. We also document differences in corporate governance that relate to Delaware incorporation. Finally, we show that firms incorporated in Delaware are no less likely to terminate CEOs in the wake of poor performance. Certain governance measures that correlate with Delaware incorporation increase likelihood of termination. The evidence presented here does not support the race to the bottom hypothesis.

Number of Pages in PDF File: 46

Keywords: Corporate governance, charter competition, CEO turnover

JEL Classification: G30, G34, K22

working papers series