Network effects in corporate governance

Sarath Sanga*

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

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 of firms 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 legal change. I conclude that network effects dominate secular trends in corporate governance.

Original languageEnglish (US)
Pages (from-to)1-41
Number of pages41
JournalJournal of Law and Economics
Volume63
Issue number1
DOIs
StatePublished - Feb 1 2020

ASJC Scopus subject areas

  • Economics and Econometrics
  • Law

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