Can Lax Corporate Law Increase Shareholder Value? Evidence from Nevada

Abstract

Recent scholarship argues that Nevada’s lax corporate law, which exempts managers from fiduciary duties and discourages takeovers, may harm shareholder wealth. I present evidence that Nevada corporate law does not harm shareholder value for firms that self-select into Nevada, particularly small firms with low institutional shareholding and high insider ownership, and it may in fact enhance the value of these firms. A possible explanation is that Nevada’s pro-managerial laws reduce the likelihood of takeovers and litigation, thereby benefiting a segment of small firms for which the costs of corporate governance may outweigh the benefits.

Keywords: Regulatory competition, Director liability, Takeovers, Shareholder litigation, Corporate Law, Nevada

JEL Classification: K22, G38