The Financial Value of Corporate Law: Evidence from (Re)incorporations

Abstract

This paper provides novel evidence concerning the association between firm value and state corporate laws, focusing on (re)incorporations in Delaware. As (re)incorporations are endogenous, we use plausibly exogenous variation in the state of incorporation at the IPO stage from the law firm identity, finding that Delaware incorporation is negatively related to firm value. Consistent with this, firms reincorporating into (out of) Delaware decrease (increase) in firm value in the time-series. These results seem incompatible with a managerial entrenchment explanation of the relationship between state corporate law and firm value, as reincorporations into Delaware are associated with increased takeover activity, suggesting that Delaware is relatively takeover-friendly. Rather, our results appear to be driven by firms where potential conflict of interests between shareholders and other stakeholders are likely to be more severe. This suggests that state corporate laws matters for firm value primarily by addressing the problem of shareholders’ limited commitment to long-term value creation.

Keywords: State corporate law, Delaware, reincorporation, firm value, limited commitment, moral hazard, shareholders, stakeholders

JEL Classification: G34, G38, K22