Delaware Law as Lingua Franca: Theory and Evidence

53 Pages Posted: 4 Nov 2012 Last revised: 18 Mar 2015

Brian J. Broughman

Indiana University Maurer School of Law

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

Darian M. Ibrahim

William & Mary Law School

Date Written: July 8, 2014

Abstract

Why would a firm incorporate in Delaware rather than in its home state? Prior explanations have focused on the inherent features of Delaware corporate law, as well as the positive network externalities created by so many other firms domiciling in Delaware. We offer an additional explanation: a firm may choose Delaware simply because its law is nationally known and thus can serve as a “lingua franca” for in-state and out-of-state investors. Analyzing the incorporation decisions of 1,850 VC-backed startups, we find evidence consistent with this lingua-franca explanation. Indeed, the lingua-franca effect appears to be more important than other factors that have been shown to influence corporate domicile, such as corporate-law flexibility and the quality of a state’s judiciary. Our study contributes to the literature on the market for corporate charters by providing evidence that Delaware’s continued dominance is in part due to investors’ familiarity with its corporate law.

Keywords: incorporation, domicile, Delaware, corporate governance, entrepreneurs, founders, startups, corporation, corporate law, charters, venture capital

JEL Classification: K22, G24, G34

Suggested Citation

Broughman, Brian J. and Fried, Jesse M. and Ibrahim, Darian M., Delaware Law as Lingua Franca: Theory and Evidence (July 8, 2014). 57 Journal of Law and Economics 865-895 (2014). Available at SSRN: https://ssrn.com/abstract=2117967 or http://dx.doi.org/10.2139/ssrn.2117967

Brian J. Broughman

Indiana University Maurer School of Law ( email )

211 S. Indiana Avenue
Bloomington, IN 47405
United States

Jesse M. Fried (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/10289/Fried

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Darian M. Ibrahim

William & Mary Law School ( email )

South Henry Street
P.O. Box 8795
Williamsburg, VA 23187-8795
United States

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