This Article builds on our prior empirical research showing that, everything else equal, start-up firms financed by out-of-state investors are more likely to incorporate in Delaware. We argue that this finding is due to out-of-state investors’ familiarity with Delaware corporate law, and relative lack of familiarity with the corporate law of the start-up’s home state. In the current project, we extend our prior research by (i) developing an informal model distinguishing investor familiarity from related economic theories of network effects and learning effects, (ii) showing that our data are more consistent with familiarity than with these alternative explanations, and (iii) discussing normative implications of the familiarity effect for corporate choice of domicile. Since our prior work was written primarily for economists, this Article publicizes our empirical findings to legal scholars and practitioners. In addition, the normative implications of our findings should be of great interest to scholars following the corporate federalism debate. The remainder of the Article proceeds as follows. In Part II, the Article provides a theory for how investor familiarity impacts a private firm’s choice of domicile and uses a numeric example to distinguish familiarity from related economic theories of network effects and learning effects. Part III discusses the results of our prior study testing for a familiarity effect and recaps those findings, including new regression results showing familiarity’s role as a dominant explanation for Delaware’s dominance, contrasting familiarity’s effect with that of substantive law quality and network effects. Part IV explores normatively what our familiarity findings might mean for state competition and the overall quality of Delaware law. Part V offers a brief conclusion.
Brian J. Broughman & Darian M. Ibrahim,
San Diego L. Rev.
Available at: https://digital.sandiego.edu/sdlr/vol52/iss2/2