Does the Evidence Favor State Competition in Corporate Law?

Abstract

One of the central debates in corporate law concerns the merits of regulatory competition in this area. Supporters of state competition have long proclaimed that the empirical evidence clearly supports their view. We argue that the existing empirical evidence on which supporters of state competition have relied does not warrant this claim. The empirical evidence, we show, is in fact entirely consistent with the opposing view that state competition works poorly with respect to some corporate issues, such as takeover regulation, that substantially affect corporate managers’ private interests. We also put forward a new approach to the empirical study of the subject, based on analyzing the determinants of companies’ choices of state of incorporation. Evidence obtained employing this approach indicates that, contrary to the beliefs of state competition supporters, states that amass antitakeover statutes are more successful in the incorporation market. Supporters of state competition, we conclude, should revisit some strongly held positions. Our conclusions have significant policy implications for corporate governance, takeover law, and the role of federal law in the corporate area. JEL classification: G30, G38, H70, K22.