Does the Evidence Favor State Competition in Corporate Law?
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Tel Aviv University - Eitan Berglas School of Economics; Harvard Law School; National Bureau of Economic Research (NBER)
Harvard Law School; European Corporate Governance Institute (ECGI)
California Law Review, Vol. 90, pp. 1775-1821, 2002
Harvard Law and Economics Discussion Paper No. 352
In the ongoing debate on state competition over corporate charters supporters of state competition have long claimed that the empirical evidence clearly supports their view. This article shows, however, that the body of empirical evidence on which supporters of state competition have relied does not warrant this claim. This empirical evidence, we argue, is in fact entirely consistent with the opposing view that state competition provides undesirable incentives with respect to corporate issues, such as takeover regulation, that substantially affect managers' private benefits.
We first show that reported findings of a positive correlation between incorporation in Delaware and increased shareholder wealth are not robust and are much more mixed and ambiguous than has been recognized. Furthermore, we argue that the presence of such causation would in any event not establish that Delaware incorporation increases value rather than simply chosen by higher value companies.
We next show that, even if Delaware incorporation were found to cause an increase in shareholder value, this finding would not imply that state competition is working well; benefits to incorporating in the dominant state would likely exist in a "race-toward-the-bottom" equilibrium in which state competition provides undesirable incentives. Finally, we show that empirical claims that state competition rewards moderation in the provision of antitakeover protections are not well grounded.
We conclude by endorsing a new approach to the empirical study of the subject that is based on analyzing the determinants of companies' choices of state of incorporation. Recent work based on this approach indicates that, contrary to the beliefs of state competition supporters, states that amass antitakeover statutes are more successful in the incorporation market.
Number of Pages in PDF File: 49
Keywords: Delaware, incorporations, corporate charters, regulatory competition, corporate governance, managers, shareholders, takeovers, antitakeover statutes
JEL Classification: G30, G38, H70, K22Accepted Paper Series
Date posted: March 6, 2002 ; Last revised: April 29, 2009
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