An Empirical Analysis of the Reincorporation Decision

The literature suggests two competing explanations for reincorporations: efforts at managerial entrenchment and attempts to improve contractual efficiency. The empirical evidence to date is inconclusive. To seek further evidence, we examine a large sample of firms that changed their state of incorpo...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 1998-12, Vol.33 (4), p.549-568
Main Authors: Heron, Randall A., Lewellen, Wilbur G.
Format: Article
Language:English
Subjects:
Business structures
Certificates of deposit
Company management
Comparative analysis
Data analysis
Empirical research
Financial economics
Investors
Limited liability
Management
Outside directors
Quantitative analysis
Regression analysis
Samples
Shareholders
Statistical significance
Stock prices
Stock returns
Stockholders
Take-overs
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Summary:The literature suggests two competing explanations for reincorporations: efforts at managerial entrenchment and attempts to improve contractual efficiency. The empirical evidence to date is inconclusive. To seek further evidence, we examine a large sample of firms that changed their state of incorporation over the period 1980–1992. We find that shareholder wealth is decreased by reincorporations that erect takeover defenses, but is increased by reincorporations that establish limits on director liability. Firms that claim they reincorporate to limit the personal liability of their board members and thereby attract better qualified outside directors do, in fact, expand the outside representation on their boards, whereas firms citing other motives do not.
ISSN:0022-1090
1756-6916
DOI:10.2307/2331131