Does the Evidence Favor State Competition in Corporate Law?

49 Pages Posted: 6 Mar 2002 Last revised: 29 Apr 2009

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Alma Cohen

Harvard Law School; Tel Aviv University - Eitan Berglas School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Allen Ferrell

Harvard Law School; European Corporate Governance Institute (ECGI)

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Abstract

In the ongoing debate on state competition over corporate charters supporters of state competition have long claimed that the empirical evidence clearly supports their view. This article shows, however, that the body of empirical evidence on which supporters of state competition have relied does not warrant this claim. This empirical evidence, we argue, is in fact entirely consistent with the opposing view that state competition provides undesirable incentives with respect to corporate issues, such as takeover regulation, that substantially affect managers' private benefits.

We first show that reported findings of a positive correlation between incorporation in Delaware and increased shareholder wealth are not robust and are much more mixed and ambiguous than has been recognized. Furthermore, we argue that the presence of such causation would in any event not establish that Delaware incorporation increases value rather than simply chosen by higher value companies.

We next show that, even if Delaware incorporation were found to cause an increase in shareholder value, this finding would not imply that state competition is working well; benefits to incorporating in the dominant state would likely exist in a "race-toward-the-bottom" equilibrium in which state competition provides undesirable incentives. Finally, we show that empirical claims that state competition rewards moderation in the provision of antitakeover protections are not well grounded.

We conclude by endorsing a new approach to the empirical study of the subject that is based on analyzing the determinants of companies' choices of state of incorporation. Recent work based on this approach indicates that, contrary to the beliefs of state competition supporters, states that amass antitakeover statutes are more successful in the incorporation market.

Keywords: Delaware, incorporations, corporate charters, regulatory competition, corporate governance, managers, shareholders, takeovers, antitakeover statutes

JEL Classification: G30, G38, H70, K22

Suggested Citation

Bebchuk, Lucian A. and Cohen, Alma and Ferrell, Allen, Does the Evidence Favor State Competition in Corporate Law?. California Law Review, Vol. 90, pp. 1775-1821, 2002, Harvard Law and Economics Discussion Paper No. 352, Available at SSRN: https://ssrn.com/abstract=303417 or http://dx.doi.org/10.2139/ssrn.303417

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alma Cohen

Harvard Law School ( email )

Cambridge, MA 02138
United States
(617) 496-4099 (Phone)
(617) 812-0554 (Fax)

Tel Aviv University - Eitan Berglas School of Economics ( email )

Ramat Aviv, Tel Aviv, 69978
Israel

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Allen Ferrell

Harvard Law School ( email )

Griswold 303 1525 Massachusetts Avenue
Cambridge, MA 02138
United States
(617) 495-8961 (Phone)
(617) 495-1110 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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