"Revisiting Corporate Governance Regulation: Firm Heterogeneity and the Market for Corporate Domicile"
Publication type: Working paper
This paper uses a discrete choice framework to analyze state design and firm choice of the implications of incorporation: corporate governance laws, corporate taxes and court structure. Firms — differentiated on ownership, management, industry concentration, financial profile and unobservable dimensions — freely choose their preferred state of incorporation or reincorporation. The revealed preference embedded in this observable choice is used as window into the heterogeneous preferences within and across firms, yielding several findings: For example, I find, surprisingly, that firms are very responsive to incorporation and franchise taxes. In addition, on average, firms like antitakeover statutes, but, consistent with an agency story, firms with an institutional shareholder block and venture capital backed firms dislike them. On average, firms dislike mandatory governance statutes restricting managerial power and facilitating the representation of minority shareholders, but these laws are less restrictive for the choice of firms in concentrated industries. All firms dislike well functioning courts, consistent with a litigation deterrence motive. The recovered firm preferences are then taken to the simulation of recently proposed federal reforms aimed at centralizing the domicile implications and restricting firm choice. (JEL Codes: G30, G34, G38, K22, L19)
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