The Influence of State Legal Environments on Firm Incorporation Decisions and Values

34 Pages Posted: 29 Oct 2004

See all articles by Stephen P. Ferris

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance

Robert M. Lawless

University of Illinois College of Law

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business

Date Written: October 2004

Abstract

This study examines whether the state legal environment influences where IPOs elect to incorporate and their subsequent market value. To examine these questions, we develop a new measure of the state legal environment that incorporates both the presence of critical statutes and the willingness of a state to innovate. We conclude that this new measure offers legal academics, practitioners and others interested in corporate finance, a highly convenient and quantitative evaluation of a state's corporate legal climate. Our empirical use of this measure yields important cross-sectional variations in state legal environments, with the result that the most promanagement state is Pennsylvania. We also find that firms exhibit a willingness to separate their operational headquarters from the state of incorporation in a manner consistent with the promanagement orientation of the state legal code. Finally, we find that the state legal environment does effect firm value, but in a way that is consistent with a "race to the bottom" view of corporate law.

Keywords: incorporation, state law, firm value

JEL Classification: G3, K22

Suggested Citation

Ferris, Stephen P. and Lawless, Robert M. and Noronha, Gregory, The Influence of State Legal Environments on Firm Incorporation Decisions and Values (October 2004). Available at SSRN: https://ssrn.com/abstract=612341 or http://dx.doi.org/10.2139/ssrn.612341

Stephen P. Ferris (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

214 Middlebush Hall
Columbia, MO 65211
United States
573-882-6272 (Phone)
573-884-6296 (Fax)

Robert M. Lawless

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business ( email )

1900 Commerce Street
Campus Box 358420
Tacoma, WA 98402-3100
United States

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