An Empirical Study of Corporate Default Rules and Menus in China, Hong Kong and Taiwan

Abstract

Competing theories of default rules and menus in contract law and corporate law provide different accounts of their effects. However, empirical studies are scant, and all focus on American law. Given that corporate ownership outside of the U.S. is usually concentrated, and institutional settings are vastly different, one might wonder whether corporate law and economic theories on default rules and menus aptly explain corporate practices in other countries. To that end, this article analyzes a unique dataset of 498 randomly sampled and hand-coded charters of public firms in China, Hong Kong, and Taiwan. While the data do not enable us to make causal inferences, we make descriptive contribution to the literature by examining whether corporate practices in the studied jurisdictions are consistent with the American theories. The major findings are that firms often opted into menus and rarely opted out of default rules without menus, thereby supporting the minimization of transaction cost theory. However, Chinese firms may follow default rules for non-economic reasons. Hansmann’s delegation theory explains the short corporate charters observed in Taiwan, but not those in China and Hong Kong. Corporations in China, Hong Kong, and Taiwan do not appear to be systematically more pro-minority or pro-controller than their jurisdictions’ corporate laws. This contradicts the principal-agent theory.

Keywords: Mandatory rule, minimum threshold rule, default rule, menu, null rule, transaction costs, principal-agent theory, corporate charters

JEL Classification: K22, K12