Explaining Delaware's Dominance: Firm Heterogeneity and Demand for Legal Flexibility

This paper investigates why Delaware has become the dominant jurisdiction for U.S. public firms. We argue that Delaware’s preeminence lies in its flexible, judge-made standards, which adapt to changing economic conditions and balance managerial discretion with investor protection. Delaware’s market share surged from 1980 to 2010, a period marked by merger waves and rising institutional ownership. Using a structural model that incorporates firm heterogeneity, we show that demand for legal flexibility, rather than doctrinal clarity, explains Delaware’s dominance. Our analysis contributes to debates on the linkage between legal institutions and financial development by highlighting the role of common-law flexibility.