TY - JOUR
T1 - Network effects in corporate governance
AU - Sanga, Sarath
N1 - Funding Information:
I thank Roberta Romano, who made contributions to this paper and is primarily responsible for assembling the data on legal domicile. I also thank Kenneth Ayotte, Jonah Gelbach, Christine Jolls, Louis Kaplow, Gabriel Rauterberg, Steven Davidoff Solomon, Holger Spamann, Eric Talley, and seminar participants at the University of Chicago, the University of Michigan, Harvard University, the University of Pennsylvania, Boston University, George Mason University, Hitotsubashi University, Northwestern University, New York University, the University of Toronto, the University of California, Berkeley, and the National Bureau of Economic Research Summer Institute for helpful comments. This research was supported by the Northwestern University Pritzker School of Law Faculty Research Program.
Publisher Copyright:
© 2020 by The University of Chicago. All rights reserved.
PY - 2020/2/1
Y1 - 2020/2/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=85083973057&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85083973057&partnerID=8YFLogxK
U2 - 10.1086/706191
DO - 10.1086/706191
M3 - Article
AN - SCOPUS:85083973057
SN - 0022-2186
VL - 63
SP - 1
EP - 41
JO - Journal of Law and Economics
JF - Journal of Law and Economics
IS - 1
ER -