Self-Selection and Heterogeneity in Firms’ Choice of Corporate Law
295 Theoretical Inquiries in Law 16.1 (2015)
20 Pages Posted: 22 Oct 2011 Last revised: 1 May 2019
Date Written: October 20, 2011
Despite extensive theoretical and empirical literature several puzzles remain regarding the market for corporate law: Why many firms do not choose Delaware; why these firms incorporate in their home state; why Delaware does not offer a second, optional lax law, to these firms; and what explains the success of Nevada.
This Essay offers a potential explanation to these puzzles: that Delaware attracts firms with relatively weak preference for managerial protection. Firms with stronger preference for managerial protection either remain in their home state where they have political influence or incorporate in Nevada.
The essay explains the theoretical arguments and assumptions that support this form of self-selection and discuss evidence that is consistent with it.
The paper discusses implications of this potential self-selection. On the one hand, self-selection provides valuable information to investors. On the other hand the self-selection account may suggest that firms that need regulation most opt for lax law.
Keywords: Delaware, Agency Costs, Self-Selection, Nevada, Race to the Bottom, Race to the Top
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