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Network Effects in Corporate Governance

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  • Sarath Sanga

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.

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  • Sarath Sanga, 2020. "Network Effects in Corporate Governance," Journal of Law and Economics, University of Chicago Press, vol. 63(1), pages 1-41.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/706191
    DOI: 10.1086/706191
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