Delaware Law as Lingua Franca: Theory and Evidence

Brian Broughman, Jesse M. Fried and Darian Ibrahim

Journal of Law and Economics, 2014, vol. 57, issue 4, 865 - 895

Abstract: Why would a firm incorporate in Delaware rather than in its home state? Prior explanations have focused on the inherent features of Delaware corporate law and on the positive network externalities created by so many other firms domiciling in Delaware. We offer an additional explanation: a firm may choose Delaware simply because its law is nationally known and thus can serve as a lingua franca for in-state and out-of-state investors. Analyzing the incorporation decisions of 1,850 venture-capitalist-backed start-ups, we find evidence consistent with this lingua franca explanation. Indeed, the lingua franca effect appears to be more important than other factors that have been shown to influence corporate domicile, such as corporate law flexibility and the quality of a state's judiciary. Our study contributes to the literature on the market for corporate charters by providing evidence that Delaware's continued dominance is in part due to investors' familiarity with its corporate law.

Date: 2014
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