The Myth of State Competition in Corporate Law

Kahan, Marcel; Kamar, Ehud

doi:10.2139/ssrn.334120

Cited by 23 publications

(20 citation statements)

References 7 publications

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“…Our results indeed confirm the view that other states cannot challenge Delaware by merely copying its statutory code (Bebchuk & Hamdani, 2002, Kahan & Kamar, 2002. In fact, as predicted by , if Nevada tried to replicate Delaware it would lose significant market share.…”

Section: Counterfactualssupporting

confidence: 85%

“…3 An influential strand of this literature argues that the substance of corporate law matters relatively little for incorporation decisions. Firms may prefer to incorporate in the same state as other firms to benefit from network externalities, learning benefits (Klausner, 1995;Kahan & Klausner, 1997; Kamar, 1998;Kahan & Kamar, 2002) and familiarity of the law (Broughman et al, 2014). 4 On this view, demand for corporate laws is inelastic, and Delaware is bound to maintain its position irrespective of the substance of its laws or the laws of other states.…”

Section: Introductionmentioning

confidence: 99%

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Regulatory Competition and the Market for Corporate Law

Eldar

Magnolfi

2015

SSRN Journal

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This article develops an empirical model of firms' choice of corporate laws under inertia. Delaware dominates the incorporation market, though recently Nevada, a state whose laws are highly protective of managers, has acquired a sizable market share. Using a novel database of incorporation decisions from 1995-2013, we show that most firms dislike protectionist laws, such as anti-takeover statutes and liability protections for officers, and that Nevada's rise is due to the preferences of small firms. Our estimates indicate that despite inertia, Delaware would lose significant market share and revenues if it adopted protectionist laws. Our findings support the hypothesis that Delaware faces competitive pressure to maintain its current laws, and that managers are willing to commit to such laws in order to attract capital.

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Section: Counterfactualssupporting

confidence: 85%

Section: Introductionmentioning

confidence: 99%

Regulatory Competition and the Market for Corporate Law

Eldar

Magnolfi

2015

SSRN Journal

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“…Delaware was, for example, conspicuously a latecomer with respect to antitakeover legislation, and its constraints on hostile bids are generally milder than those in other states. 142 Incorporating in one's home state also increases the chances that corporate litigation will take place in the courts of that state, where judges are more likely to be particularly sensitive to the interests of local businesspersons. And, going in the other direction, incorporating locally is probably an effective signal that one considers one's interests focused in the home state, and hence increases one's local political influence.…”

Section: General Corporation Charteringmentioning

confidence: 99%

Regulatory Dualism as a Development Strategy: Corporate Reform in Brazil, the U.S., and the EU

2010

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Countries pursuing economic development confront a fundamental obstacle. Reforms that increase the size of the overall pie are blocked by powerful interests that are threatened by the growth-inducing changes. This problem is conspicuous in efforts to create effective capital markets to support economic growth. Controlling owners and managers of established firms successfully oppose corporate governance reforms that would improve investor protection and promote capital market development. In this article, we examine the promise of regulatory dualism as a strategy to diffuse the tension between future growth and the current distribution of wealth and power. Regulatory dualism seeks to mitigate political opposition to reforms by permitting the existing business elite to be governed by the old regime, while allowing other firms to be regulated by a new parallel regime that is more efficient. Regulatory dualism goes beyond similar but simpler strategies, such as grandfathering and statutory menus, by incorporating a dynamic element that is key to its effectiveness, but that requires a sophisticated approach to implementation.A paradigmatic example of regulatory dualism is offered by Brazil's "New Market" (Novo Mercado), a voluntary premium segment within the São Paulo Stock Exchange that allows companies to commit credibly to significant protection of minority shareholders without imposing reform on companies controlled by the established elite. Yet regulatory dualism as a strategy for capital market reform is not unique to Brazil, nor is it suited just to developing countries. The long-standing U.S. approach to state-level corporate chartering is arguably better understood as a form of regulatory dualism thanas is the custom -as a form of regulatory competition, and the same can be said of EU corporate law post-Centros. The dramatic failure of Germany's Neuer Markt illustrates some of the pitfalls of regulatory dualism. If thoughtfully deployed, however, regulatory dualism holds substantial promise in overcoming political barriers to reform, not just of corporate governance and capital markets, but of other economic institutions as well.

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“…To the extent that they result from the avoidance of court fees, it is worth noting that Delaware courts charge only minimal fees. 113 Finally, to the extent that costs are saved by limiting discovery 114 and by reducing the role of law in resolving conflicts, it is, once again, very dubious whether many parties are willing to pay P. 34 that price. Many potential investors may be deterred if their rights are subject to the uncertainties of arbitration.…”

Section: Extraterritorial Courts Versus Arbitrationmentioning

confidence: 99%