Federalism, Variation, and State Regulation of Franchise Termination

This article discusses and expands on our recent work examining the effects of franchise-termination laws. In a prior article, we examined empirically the effect of franchise-termination laws on the level of franchise activity. Our analysis improved upon the prior literature in two major ways. First, our work exploited two new sources of panel data to provide new empirical evidence on the effect of franchise termination laws. Second, our analysis examined variation in states’ restrictions on the ability of franchisors and franchisees to contract around a particular state’s regulation. We found that the effects of termination laws on the overall level of franchise activity are negligible when states do not limit the parties’ ability to contract around the laws, but become significant when states impose such limits. Our results show that contracting parties’ ability to exit from a state’s regulations is a significant factor in determining the effect of regulation, and should be taken into account by policy makers. It also demonstrates the importance of taking state variation into account when analyzing the effect of state regulation. This article further examines these issues. We discuss the policy issues related to contractual exit from state regulation. In addition, we present further evidence on the effects of variation in franchise regulation by examining the marginal effect of giving franchisees a right to cure violations

Nevada and the Market for Corporate Law

Berle and Means’s view that managers rather than shareholders control our largest corporations finds important expression in William Cary’s famous article arguing that managers have led shareholders on a “race to the bottom” whose finish line is Delaware. These views, in turn, support supplanting state corporation law with federal regulation of corporate governance. Concerns about a race to the bottom lately focus on Nevada, which seeks to be Delaware’s first real competitor for out-of-state firms in the national incorporation market. Evidence suggests that Nevada’s strategy is to raise tax revenues by offering a significantly laxer corporate law than Delaware. We examine Nevada’s strategy and incorporation history to show that there is an alternative explanation for Nevada law that does not raise concerns about a race to the bottom. Specifically, we argue Nevada corporation law may actually reduce some firms’ total agency costs by reducing the costs of judicial monitoring. This analysis has implications as to the need for federal regulation of corporate governance

Nevada and the Market for Corporate Law

Berle and Means’s view that managers rather than shareholders control our largest corporations finds important expression in William Cary’s famous article arguing that managers have led shareholders on a “race to the bottom” whose finish line is Delaware. These views, in turn, support supplanting state corporation law with federal regulation of corporate governance. Concerns about a race to the bottom lately focus on Nevada, which seeks to be Delaware’s first real competitor for out-of-state firms in the national incorporation market. Evidence suggests that Nevada’s strategy is to raise tax revenues by offering a significantly laxer corporate law than Delaware. We examine Nevada’s strategy and incorporation history to show that there is an alternative explanation for Nevada law that does not raise concerns about a race to the bottom. Specifically, we argue Nevada corporation law may actually reduce some firms’ total agency costs by reducing the costs of judicial monitoring. This analysis has implications as to the need for federal regulation of corporate governance

Choice of Form and Network Externalities

This Article provides the first detailed empirical analysis of firms\u27 choice of organizational form. It provides important evidence on whether there is an efficient market in organizational forms or firms\u27 choice of form is impeded by network externalities. We focus on formations of limited liability partnerships (LLPs) and limited liability companies (LLCs) in examiningthe effect of various factors on firms\u27 choice of business form. Our data provides important evidence against the network externalities hypothesis. Because the LLP and LLC forms are similar except for the LLPs link to the existing network of partnership law, firms would prefer the LLP to the LLC form if network externalities mattered. In fact, we find that firms prefer the LLC form. Moreover, the reduced relative popularity of LLCs in states that impose entity taxes on LLCs but not LLPs, and the increased relative popularity of LLCs in states and years in which LLCs have particular inherent advantages, provide further evidence that the inherent characteristics of the two business forms, rather than network externalities, are driving choice of form