Corporate Governance Law: Firm Heterogeneity and the Market for Corporate Domicile

Abstract

This paper uses a discrete choice framework to analyze state design and firm choice of the implications of incorporation: corporate governance laws, corporate taxes and court features. Firms --- differentiated by ownership, management, industry concentration, financial profile and unobservable dimensions --- freely choose their preferred state of incorporation or reincorporation for each financial year. The revealed preference embedded in these many observable choices allows for the identification and quantification of the differential corporate governance preferences within and across firms. For example, we find that on average, firms like antitakeover statutes, but, consistent with an agency story, firms with an institutional shareholder block and venture capital backed firms dislike them. On average, firms dislike mandatory governance statutes restricting managerial power and facilitating the representation of minority shareholders; however, firms in concentrated industries are much less influenced by these laws. Additionally, all firms dislike well functioning courts, consistent with a litigation deterrence motive. We also find that firms are very responsive to incorporation and franchise taxes, which allows us to quantify their preferences for law and court features. Counterfactual policies aimed at creating uniform federal law and restricting firm choice are simulated using the firm specific preferences recovered from our model.

Keywords: Corporate Governance, Law and Economics, Incorporation, Demand Estimation, Differentiated Products, Discrete Choice

JEL Classification: G30, G34, G38, K22, L19