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 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. Delaware firms also enjoyed abnormal returns precisely during those years in which the Delaware network grew most. I conclude that network effects dominate secular trends in corporate governance.