Location

Room 140

Start Date

26-8-2019 12:00 PM

End Date

26-8-2019 1:50 PM

Description

Most public companies incorporate in Delaware. Is this because they prefer its legal system or are they simply following a trend? Using the incorporation histories of over 22,000 public companies from 1930 to 2010, I show that firms are more influenced by changes in each other’s decisions than by changes in the law. The analysis exploits an unexpected legal shock that increased Delaware’s long-run share from 30 to 74 percent. I attribute most of this change to a cascading effect in which the decisions of past firms successively influence future cohorts. These decisions are also highly path dependent: In a counterfactual setting without switching costs, firms would be five times more likely to reincorporate in response to a given a legal change. I conclude that network effects dominate secular trends in corporate governance.

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Aug 26th, 12:00 PM Aug 26th, 1:50 PM

Network Effects in Corporate Governance

Room 140

Most public companies incorporate in Delaware. Is this because they prefer its legal system or are they simply following a trend? Using the incorporation histories of over 22,000 public companies from 1930 to 2010, I show that firms are more influenced by changes in each other’s decisions than by changes in the law. The analysis exploits an unexpected legal shock that increased Delaware’s long-run share from 30 to 74 percent. I attribute most of this change to a cascading effect in which the decisions of past firms successively influence future cohorts. These decisions are also highly path dependent: In a counterfactual setting without switching costs, firms would be five times more likely to reincorporate in response to a given a legal change. I conclude that network effects dominate secular trends in corporate governance.