Race to the Top or Bottom? Corporate Governance, Freedom of Reincorporation and Competition in Law

40 Pages Posted: 17 Aug 2005  

Zsuzsanna Fluck

Michigan State University - Department of Finance

Colin Mayer

University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Oxford - Said Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

Abstract

This paper investigates the governance structure choices of firms when there is competition between legal systems. We study the impact of the allocation of control over choice of governance and reincorporation on firms' technologies and technological specialization of countries in the context of a model of the firm in which there are agency conflicts between shareholders and managers. We show that the allocation of control over firms' reincorporation decisions determines the corporate governance choice ex ante and the outcome of the competition between legal regimes ex post. When managers have control over firms' reincorporation then competitive deregulation and 'runs to the bottom' ensue. When shareholders have partial or full control, then there is diversity in governance structures. Runs to the bottom are not necessarily socially undesirable but they have a feedback effect on firms' choices of technologies that may make the party in control worse off ex ante. We show that it is impossible for any country to achieve social welfare maximization of its existing and new enterprises. With competition between legal regimes, start-up and mature companies incorporate in different jurisdictions even when reincorporation is correctly anticipated.

Keywords: Corporate governance, competition between legal systems, freedom or reincorporation, shareholder protection, technology choice, managerial private benefits

JEL Classification: G34, K22

Suggested Citation

Fluck, Zsuzsanna and Mayer, Colin, Race to the Top or Bottom? Corporate Governance, Freedom of Reincorporation and Competition in Law (July 2005). CEPR Discussion Paper No. 5133. Available at SSRN: https://ssrn.com/abstract=784684

Zsuzsanna Fluck

Michigan State University - Department of Finance ( email )

Eli Broad Graduate School of Management
315 Eppley Center
East Lansing, MI 48824-1122
United States
517-353-3019 (Phone)
517-432-1080 (Fax)

Colin Mayer (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288112 (Phone)
+44 1865 288805 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288112 (Phone)
+44 1865 288805 (Fax)

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