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Does Delaware Entrench Management?

Among my great pieces of good fortune during my time in law school at the University of Virginia was to meet and befriend – and to co-author several papers with – Adam Pritchard, now a professor at the University of Michigan School of Law, specializing in securities law.  (Adam and I haven’t written anything together in many years, but I hope that that’ll change soon.)  I look forward to reading this new working paper that he co-authored with Murali Jagannatha; it’s entitled “Does Delaware Entrench Management?”  I’m not surprised by the finding about Delaware, but I am surprised by the finding on the apparent lack of correlation between the strength of state anti-takeover legislation and management entrenchment.  Here’s the abstract:

Critics have charged that state competition in corporate law, which Delaware clearly dominates, leads to a “race to the bottom” promoting management entrenchment at shareholders’ expense. We present evidence here inconsistent with this hypothesis. Measures of director quality and governance mechanisms are higher in Delaware. Delaware’s directors hire higher quality CEOs and they are more likely to terminate CEOs.
Tenures of Delaware directors and CEOs are both lower than their counterparts in other states. In addition, contrary to claims that anti-takeover laws promote management entrenchment, we find that states that provide the greatest anti-takeover protection – Ohio, Pennsylvania, Massachusetts, and Maryland – do not have significantly different turnover rates from California, the state that arguably offers the least anti-takeover protection.


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