Social Learning and the Development of Corporate Law

The development of U.S. corporate law has traditionally been explained through a race model: jurisdictions compete for corporate franchise taxes and thus corporate law converges towards efficiency. Recent critiques have undermined this argument without presenting a new model in its place. This paper develops theoretically and tests empirically two alternative theories of corporate law development, and finds some support for an interest group theory, and substantial support for a social learning theory of corporate law development. This paper’s first part is theoretical, and develops the political interest group and the social learning models. An interest group theory portrays self-interested managers, lawyers and workers as able to overcome collective action problems and successfully lobby for corporate law that advantages them. Several corporate law theorists have highlighted the relevance of diverse interest-group claims; this paper synthesizes and systematizes these arguments. A social learning model understands norms as substantial constraints on self-interested behavior, and sees the diffusion of new corporate laws as the result of their legitimacy, which may or may not coincide with efficiency. Sociologists have identified the importance of social norms on corporate manager choices, and political scientists have noted substantial imitation between state legislatures in many other issue areas, but a social learning model of corporate law has not yet been developed. The paper’s second part is empirical. The paper derives predictions from the race, interest group and social learning theories, and examines whether they hold true in the development of U.S. state corporate law. The empirical analysis focuses on the development of second-generation anti-takeover laws, both because these have been a central issue in state corporate law, and because they constitute hard test case for a norms-based theory, given the substantial material interests at stake here. Cumulative adoption patterns, multivariate regressions, and some qualitative evidence lend substantial support to the social learning theory, mixed support to the interest group theory, and very limited support to the race theory. A final empirical section extends this analysis to corporate governance transitions in post-communist countries. The paper’s third part identifies the normative implications of these three theories with regard to the uniformity and quality of corporate law, as well as with regard to the process of corporate law adoption and the effect of non-binding standards. If a social learning model explains important aspects of corporate law development, we need not shift corporate law to the federal level to achieve uniform, high quality governance: non-binding standards could move us effectively in that direction. At the same time, the social learning model implies caution, because inefficient practices can spread just as easily as efficient ones. The fourth part concludes.