What Do Corporate Default Rules and Menus Do? An Empirical Examination

Authors


  • I am grateful to Ian Ayres, Guido Calabresi, Daniel Ho, Henry Hansmann, Alvin Klevorick, Siona Listokin, Stephanie Listokin, Jonathan Macey, Roberta Romano, Alan Schwartz, and seminar participants at Harvard Law School, Northwestern Law School, Stanford Law School, University of Chicago Law School, University of Miami Law School, University of Pennsylvania Law School, and Yale Law School for many insightful comments. I thank the John M. Olin Fellowship and the Yale Center for the Study of Corporate Law for financial support.

*Associate Professor, Yale Law School.

Abstract

Much of corporate law consists of nonmandatory statutes. Although scholars have examined the effect of nonbinding corporate law from a theoretical perspective, only inconclusive event studies explore the real-world impact of these laws. This article empirically examines the impact of nonmandatory state anti-takeover statutes. Several conclusions emerge. Despite its nonbinding nature, corporate law makes an enormous difference in outcomes, contradicting those who claim that corporate law is trivial. Two types of nonmandatory corporate laws have particularly important effects. Corporate default laws that favor management are considerably less likely to be changed by companies than default laws favoring investors, supporting those who believe that corporate default laws can ameliorate asymmetries in incentives or bargaining power between managers and investors. Corporate “menu” laws—opt-in laws that are drafted by the state but do not apply as default rules—also facilitate the use of some provisions, supporting those who believe that nonmandatory corporate law reduces transaction costs, such as the cost of updating corporate charters to reflect developments in the economy.

Ancillary