Delaware Bankruptcy Prone

Abstract

Companies can choose their place of incorporation and with it, the law governing their internal affairs. More than 60% of large public companies choose to incorporate in Delaware. Scholars have argued, for more than two decades, that it should be proof that Delaware law is efficient and have attempted to explain why. Among the ongoing debate on state competition over corporate charters, the dominant view has been the ‘race to the top’ school of thought. Nonetheless, a growing number of scholars and practitioners argue that the state competition over corporate charters lead to a ‘race to the bottom’. This Article reports the results of an empirical study comparing the Delaware incorporated companies’ propensity to file for bankruptcy with the other US companies’ propensity to file for bankruptcy. I found that Delaware companies are more likely to file for bankruptcy. This is evidence that incorporating in Delaware may not be efficient. Also, I found that, on average, Delaware companies had a lower ratio of liabilities to assets from 1999 to 2009. But the ten percent of Delaware companies having the highest leverage ratios have higher leverage ratios between 1991 and 2009 than the same group of companies incorporated in all other states. Hence, this paper provides evidence that the more leveraged companies chose to incorporate in Delaware. This paper argues that enacting corporate law to please corporate promoters may not be in the best interest of corporations.