Incorporation Law, Ownership Structure, and Firm Value: Evidence from Canada

In this article, we reexamine the law and finance theory in the Canadian context, characterized by a dichotomy in the legal traditions that govern incorporation law across provinces. We specifically examine the relation between incorporation law, corporate ownership structure, and firm value, taking into account the endogeneity of ownership structure. Using a sample of 181 Canadian firms between 2002 and 2005, we show that firms from Quebec mostly choose to incorporate under the federal law (CBCA), perceived as more protective of shareholder rights, rather than under the provincial law (QCA). Our 2SLS regressions show that Quebec firms incorporated under the QCA tend to have more concentrated ownership and that ownership concentration is negatively related to firm value (Tobin's Q). These results are in line with the previous literature, which, in different pieces, has identified the positive relationship between less stringent legal environment and ownership concentration, as well as the negative relationship between ownership concentration and firm value. In this study, we formalize these relationships while taking into consideration the fact that firm value could also influence ownership concentration, as shown by Cho (1998). These results take on a particular importance as many researchers and organizations dedicated to the protection of investors, in Europe and in many countries around the world, have criticized the existence of ownership concentration and excess voting rights (wedge). These results thus reinforce the need for better corporate governance regulations to minimize the risks of minority shareholders expropriation.