What Happens in Nevada? Self-Selecting into Lax Law

Review of Financial Studies 2014 doi: 10.1093/rfs/hhu058

Virginia Law and Economics Research Paper No. 2011-08

61 Pages Posted: 18 Jul 2010 Last revised: 22 Feb 2016

Michal Barzuza

University of Virginia School of Law

David C. Smith

University of Virginia - McIntire School of Commerce

Date Written: December 30, 2013

Abstract

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

Suggested Citation

Barzuza, Michal and Smith, David C., What Happens in Nevada? Self-Selecting into Lax Law (December 30, 2013). Review of Financial Studies 2014 doi: 10.1093/rfs/hhu058; Virginia Law and Economics Research Paper No. 2011-08. Available at SSRN: https://ssrn.com/abstract=1644974 or http://dx.doi.org/10.2139/ssrn.1644974

Michal Barzuza (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

David Carl Smith

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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