The Influence of State Legal Environments on Firm Incorporation Decisions and Values

34 Pages Posted: 29 Oct 2004

See all articles by Stephen P. Ferris

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance

Robert M. Lawless

University of Illinois College of Law

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business

Date Written: October 2004

Abstract

This study examines whether the state legal environment influences where IPOs elect to incorporate and their subsequent market value. To examine these questions, we develop a new measure of the state legal environment that incorporates both the presence of critical statutes and the willingness of a state to innovate. We conclude that this new measure offers legal academics, practitioners and others interested in corporate finance, a highly convenient and quantitative evaluation of a state's corporate legal climate. Our empirical use of this measure yields important cross-sectional variations in state legal environments, with the result that the most promanagement state is Pennsylvania. We also find that firms exhibit a willingness to separate their operational headquarters from the state of incorporation in a manner consistent with the promanagement orientation of the state legal code. Finally, we find that the state legal environment does effect firm value, but in a way that is consistent with a "race to the bottom" view of corporate law.

Keywords: incorporation, state law, firm value

JEL Classification: G3, K22

Suggested Citation

Ferris, Stephen P. and Lawless, Robert M. and Noronha, Gregory, The Influence of State Legal Environments on Firm Incorporation Decisions and Values (October 2004). CORI Working Paper No. 2004-13. Available at SSRN: https://ssrn.com/abstract=612341 or http://dx.doi.org/10.2139/ssrn.612341

Stephen P. Ferris (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

214 Middlebush Hall
Columbia, MO 65211
United States
573-882-6272 (Phone)
573-884-6296 (Fax)

Robert M. Lawless

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business ( email )

1900 Commerce Street
Campus Box 358420
Tacoma, WA 98402-3100
United States

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