what stock prices tell us about US corporate moves #NewsMarket

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is founder and chief executive of Trivariate Research

When companies seek to shift their domicile from one US state to another in hope of a more conducive legal environment, it can draw a lot of attention. But the impact might not be so consequential — at least in what counts for their investors, the returns from their shares in the companies.

In the last year, several major US companies have moved or signalled a change in their state of incorporation for reasons such ranging from corporate governance wrangles to costs.

Delaware continues to be the dominant choice for companies for their state of corporation. Over the last 25 years, the percentage of the top 2,000 US companies by market capitalisation that are incorporated in Delaware has gone from just under 55 per cent to 70 per cent today. There are good reasons for this. The laws are well-understood and well-litigated in this “First State” of the US.

But some companies are finding reasons to move from the state. Most prominently, Tesla announced in February a move to Texas from Delaware, after a court in the dominant US state for corporate domiciles voided Elon Musk’s $56bn pay package. Musk also subsequently announced the shift of the incorporation of the unlisted SpaceX from Delaware to Texas. Likewise, his brain-chip implant company, Neuralink, changed its location of incorporation from Delaware to Nevada.

Among other listed companies, TripAdvisor cited regulatory burdens and operational costs as their rationale for seeking to move from Delaware to Nevada. Proximity to the Vegas Golden Knights might also figure in Cannae Holdings desire to move its state of incorporation to Nevada, given chair Bill Foley’s ownership of the National Hockey League team.

Geography does appear to be a rationale for the state of incorporation for most companies. In Delaware, there is broad spread of companies. Seventy-seven per cent of the companies are in five sectors — consumer discretionary, financials, healthcare, industrials and technology.

But there are more differences in other states: for instance, 84 per cent of all companies incorporated in California are financials or utilities; 71 per cent of the companies incorporated in Maryland are in the real estate sector; and 60 per cent of all the companies in Texas are either financials or industrials.

But does the state of incorporation really matter? We analysed the long-term performance of stocks in each state to see if there was any meaningful difference between states.

The volatility-adjusted performance between states is not statistically significant. The highest average performance of stocks in an individual state has been in Massachusetts, the lowest average performance in New York. The highest volatility stocks have been in Nevada, the lowest volatility in Virginia. But in aggregate, there is no statistical significance in the performance of stocks by their state of incorporation.

We then analysed whether a company that switches its state of incorporation (excluding those where the switch was the result of an acquisition) had meaningfully different stock performance before or after the proposed change in states was announced.

There were 92 such examples that were not deal-related over the past 15 years. To be exacting in our analysis, we looked at the announcement date — not the closure date — to make sure any move in a stock’s performance related to an announced change in the state of incorporation was not all “in the price” prior to the actual change.

The answer is no. We looked at the average performance of stocks — adjusted for their sensitivity to general market moves, or beta — of companies switching from one state to another. Both before and after the announcement of a switch, the stocks did not deviate from the overall market in a statistically significant way.

Some investors have postulated that it is potentially risky to own the stock of a company where it recently switched its state of incorporation. For instance, one cited concern is such moves can make it more challenging for activists to join or remain on the board of a company. Unwanted activist board members are far easier to remove in Nevada than in Delaware. The worry of some investors is that this would not be in the best interests of overall shareholders because the existing board members can prevent potentially beneficial change. On the other hand, activists often agitate for things that do not work out.

While stock performance is not really different for those changing states, moves might still well be justified. Companies should move where they see benefits such as in areas like costs, regulation and talent retention.