Jurisdictional Competition for Corporate Charters and Firm Value: A Reexamination of the Delaware Effect

Abstract

In this paper, we analyze the Delaware incorporation effect on firm value to determine if the positive association found by Daines (2001) still holds. Analyzing a sample from 1997 to 2013, we find that the relationship between Delaware incorporation and firm value is no longer positive, as found by Daines, and is in fact negative and significantly different from zero. In addition, we find that this negative relationship holds even after controlling for the effects of Sarbanes Oxley, the Financial Crisis, and foreign incorporations. We attribute this change to increasing charter competition, both within and outside of the United States. However, in line with current governance trends, we propose that Delaware's popularity may be rooted in director primacy arguments that support Delaware as a state where directors perceive they have autonomy and discretion through the Chancery Court system.

Keywords: Delaware Incorporation, Firm Value, Jurisdictional Competition

JEL Classification: G30, K20, L25