Are Delaware Firms Oranges? Fundamental Attributes and the Delaware Effect

Abstract

Is choice of incorporation state associated with differences in firms' fundamental attributes? We show that firms incorporated in Delaware are larger, younger, less profitable, more risky, spend more in R&D, and have larger Tobin's Q than non-Delaware U.S. firms. Furthermore, we show that, compared to non-Delaware firms, Delaware firms on average issue accounting statements that are more conservatively biased (thus biasing Daines' (2001) financial measures), and that Wall Street analysts issue more optimistic earnings growth projections for Delaware firms. Then we revisit Daines (2001), which suggests that Delaware-incorporated firms command a value premium over non-Delaware U.S. firms. While Daines' study controls for most of the important attributes of Delaware firms, it does not control for accounting bias and analysts' forecasts. Upon controlling for either one of these two attributes, the Delaware value premium disappears.

Keywords: corporate law and finance, analysts' forecasts, accounting bias

JEL Classification: G12, G30, M41, K40