Selection Effects, Corporate Law and Firm Value

Abstract

A significant amount of work has been done on corporate law choice and firm value (in terms of share prices, Tobin's Q, or variants), particularly in recent years. These empirical studies of the effect of corporate law on firm value have invariably used econometric methods that treat the decision to incorporate as a random event. Recent research from the U.S. and abroad has recently shown that this decision is far from random. It is quite possible that the magnitude, sign, and statistical significance of the effect of reincorporation on firm value are quite different when the selection effects are considered. Using a prior dataset that enables selection effects to be considered, I show that the accounting for selection effects using Heckman (1976, 1979) corrections is both economically and statistically significant in ascertaining the impact of corporate law on firm value.

Keywords: Reincorporation, Corporate Law, Firm Value, Heckman Selection Model

JEL Classification: K22