Thursday, July 11, 2013

Delaware, Lawsuits and Firm Value

In a previous post we noted "Doing a Large Deal:  Expect to Get Sued".  Suing corporations just got a little tougher recently.  Chancellor Leo Strine of the Delaware Court of Chancery ruled that boards can adopt bylaws that require most lawsuits to be filed in Delaware.  This restricts lawsuits filed in multiple courts and also gives corporations headquartered in Delaware what some experts have called a 'home field advantage'.  A Thomson Reuters version of this story can be read here.

Delaware is known to be pro-business and it's rapid litigation schedule and fairly low fee awards.

Yet I am reminded of empirical studies that show firms relocating to Delaware are met with increased stock returns at the announcement of the move and of this study by Robert Daines that shows firms incorporated in Delaware have increased value.

"Does Delaware Law Improve Firm Value?"

by Robert Daines

November 1999

I present evidence that Delaware corporate law improves firm value and facilitates the sale of public firms. Using Tobin?s Q as an estimate of firm value, I find Delaware firms are worth significantly more than similar firms incorporated elsewhere. The result is robust to controls for firm size, diversification, profitability, investment opportunity and industry. Delaware firms also receive significantly more takeover bids and are significantly more likely to be acquired. Firms with strong incentives to choose valuable legal regimes are likely to incorporate in Delaware when they go public. These results suggest that corporate law affects firm value.

The complete article can be downloaded here.

All the best,


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