Network Effects in Corporate Governance

Journal of Law and Economics, 63 (1), 1-41 (2020)

41 Pages Posted: 12 Dec 2017 Last revised: 12 May 2021

See all articles by Sarath Sanga

Sarath Sanga

Yale University - Law School

Date Written: February 27, 2019

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.

Keywords: corporate governance, network effects, information cascades

JEL Classification: G30, K22

Suggested Citation

Sanga, Sarath, Network Effects in Corporate Governance (February 27, 2019). Journal of Law and Economics, 63 (1), 1-41 (2020), Available at SSRN: https://ssrn.com/abstract=3086245 or http://dx.doi.org/10.2139/ssrn.3086245

Sarath Sanga (Contact Author)

Yale University - Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States

HOME PAGE: http://https://law.yale.edu/sarath-sanga

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