What Happens in Nevada? Self-Selecting into Lax Law
Review of Financial Studies 2014 doi: 10.1093/rfs/hhu058
61 Pages Posted: 18 Jul 2010 Last revised: 22 Feb 2016
Date Written: December 30, 2013
We find that Nevada, the second most popular state for out-of-state incorporations and a state with lax corporate law, attracts firms that are 30–40% more likely to report financial results that later require restatement than firms incorporated in other states, including Delaware. Our results suggest that firms favoring protections for insiders select Nevada as a corporate home, and these firms are prone to financial reporting failures. We provide some evidence that Nevada law also has a causal impact by increasing a Nevada firm’s propensity to misreport financials after the firm has incorporated in Nevada.
Keywords: corporate law, Nevada, accounting restatements, agency costs
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