Delaware's Familiarity

Abstract

Why do corporations choose to incorporate in Delaware over other states? The existing literature primarily falls into two camps — the “race-to-the-top” and the “race-to-the-bottom” — both of which credit Delaware’s success to the quality of its corporate law and the expertise of its judges. We consider an alternative explanation for Delaware’s continued success: familiarity. After decades of dominance, business parties have become increasingly familiar with Delaware law. Using data from a sample of startups financed by venture capital, we find that firms domicile in Delaware as much for familiarity reasons as for its substantive features. The Article finishes by tackling the normative implications of our findings — which are both positive and negative — for the overall quality of U.S. corporate law.

Keywords: Delaware, corporate law, venture capital, startup, entrepreneurship, network externalities, empirical, law and economics