Incorporation Choice and Implied Cost of Equity

43 Pages Posted: 24 Jul 2015

See all articles by Jere R. Francis

Jere R. Francis

Maastricht University

Michael D. Yu

State University of West Georgia

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2015


Prior studies document a Delaware incorporation effect on firm valuation, generally using Tobin’s Q, but the directional effects are mixed and inconclusive. Our study uses implied cost of equity to assess valuation, and we find consistent evidence that firms incorporated outside of their home state, either in Delaware or in other states, have a cost of equity that is 40 to 100 basis points higher than firms incorporated in their home state (depending on the model). Importantly, there is no statistical difference between Delaware incorporation and other non-home states of incorporation, which suggest the more important distinction is home state versus non-home state, rather than a Delaware effect. These findings are robust to controls for risk factors that affect the cost of equity including market beta, market value of equity, book to market ratio, analyst forecast dispersion, long-term growth in earnings, and industry membership. Results are consistent in yearly estimations for the sample period 1990-2006, and robust across the spectrum of firm size, different measures of cost of equity, and to control for endogeneity of the firms’ incorporation choice.

Keywords: Delaware; Incorporation; Corporate law; Cost of equity; Corporate governance; Regulatory competition; Home bias

JEL Classification: G12, G18, G30, G34, K22, M41

Suggested Citation

Francis, Jere R. and Yu, Michael D., Incorporation Choice and Implied Cost of Equity (July 20, 2015). Available at SSRN: or

Jere R. Francis

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD

Michael D. Yu (Contact Author)

State University of West Georgia ( email )

1601 Maple St
Carrollton, GA 30118
United States
6788396517 (Phone)

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