Volume 77, Number 6

December 2002

The Incorporation Choices of IPO Firms

Robert Daines

This Article presents the first evidence about the choice of corporate law and the market for corporate charters at an initial public offering. Though firms are free to incorporate in any of the fifty states and are said to search for optimal legal rules, they appear to simply make a binary choice: Delaware or their home state. Federalism has thus resulted in a series of local markets with one national producer, rather than a nationwide “race to the top/bottom.” This pattern raises questions about how firms choose a state of incorporation and suggests that there is a substantial home-state advantage (or home bias). Professor Daines explores reasons for this home bias and reports evidence that lawyers play a key role in determining state of incorporation and that agency costs may affect the advice they provide. Professor Daines also examines other factors that affect a firm’s domicile, including variation in state law and firm characteristics. Takeover laws do not appear to be important and there is some mixed evidence that state law may have network qualities.