Monday, October 31, 2011
Carney and Shepard have a new paper, Lawyers, Ignorance, and the Dominance of Delaware Corporate Law, which seems intuitively correct. One reason why Delaware has been able to maitain its preeminent position with respect to the corporate law is that it's the only law most lawyers who take companies public know. That seems right and suggests that Delaware's lead is as much - or more - a result of status quo bias as it is the underlying quality of the law.
Abstract: Why does Delaware continue to dominate the market for incorporations even though recent research has shown that the quality of Delaware corporate law has declined substantially? We focus on the rational ignorance of lawyers and investors. Using the results of our survey of lawyers involved in initial public offerings (IPOs) as well as our analysis of companies involved in IPOs, we conclude that lawyers recommend Delaware because they are ignorant about other states’ law. Because Delaware is so dominant, law schools focus on Delaware corporate law, and a lawyer rationally learns the corporate law only of Delaware and her home state. Regardless of the quality of the law of other states, lawyers will not recommend it because they are unfamiliar with it. Likewise, lawyers recommend only Delaware law because they believe that investors are ignorant of other states’ law.