The Influence of Antitakeover Statutes on Incorporation Choice: Evidence on the "Race" Debate and Antitakeover Overreaching

Abstract

Commentators have long debated whether competition among states for corporate charters represents a race to the top or a race to the bottom. Race-to-the-top advocates have recently gained ground in this debate on the basis of the general migration to Delaware in the 1990s and empirical evidence suggesting that Delaware incorporation increases shareholder wealth. This article uses second-generation state antitakeover statutes to shed additional light on this debate. I use a new database of reincorporations from the 1990s to show that managers generally migrate to (and fail to migrate away from) typical antitakeover statutes Given the robust econometric evidence that these statutes increase managerial agency costs and reduce shareholder wealth, my results generally support the race-to-the-bottom view. However, I also find that managers migrate away from the more severe antitakeover statutes in Massachusetts, Ohio, and Pennsylvania. This finding introduces the possibility for overreaching in the corporate charter marketplace and suggests important limits on the race to the bottom. The results have implications for recent developments in corporate charter competition in both the United States and the European Union.