What Happens in Nevada? Self-Selecting into Lax Law

Michal Barzuza and David C. Smith

The Review of Financial Studies, 2014, vol. 27, issue 12, 3593-3627

Abstract: We find that Nevada, the second most popular state for out-of-state incorporations and a state with lax corporate law, attracts firms that are 30–40% more likely to report financial results that later require restatement than firms incorporated in other states, including Delaware. Our results suggest that firms favoring protections for insiders select Nevada as a corporate home, and these firms are prone to financial reporting failures. We provide some evidence that Nevada law also has a causal impact by increasing a Nevada firm's propensity to misreport financials after the firm has incorporated in Nevada.

Date: 2014
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