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

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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.
Original languageEnglish (US)
JournalJournal of Law, Economics & Policy
Issue number1
StatePublished - 2006


  • incorporation
  • state law
  • firm value


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