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An Empirical Analysis of the Reincorporation Decision

Published online by Cambridge University Press:  06 April 2009

Randall A. Heron  and
Wilbur G. Lewellen
Randall A. Heron
Affiliation:
Kelley School of Business, Indiana University, Indianapolis IN 46202-5151
Wilbur G. Lewellen
Affiliation:
Krannert Graduate School of Management, Purdue University, West Lafayette IN 47907-1310
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Abstract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 33 , Issue 4 , December 1998 , pp. 549 - 568
Copyright
Copyright © School of Business Administration, University of Washington 1998

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