The mid-Atlantic state of Delaware boasts attractions such as beaches, parks, and museums; it’s also a talent hub for fintech, life sciences, and IT. But those are not the reasons why firms of all sizes make their home in the country’s sixth least populated state. More than two-thirds of Fortune 500 companies and 60% of publicly traded U.S. companies are incorporated in Delaware, and so were more than 80% of IPOs in 2024. Many venture capital firms also require the firms they back to incorporate in Delaware.
Experts have cited Delaware’s politically balanced judiciary and the resulting predictable legal system as the chief reason why companies flock to the state. One test of that premise is how companies and their shareholders benefit from that legal system. A recent paper titled “The Market Value of Partisan Balance” by Brian D. Feinstein, Wharton professor of legal studies and business ethics, and Daniel J. Hemel, New York University law professor, zeroes in on the so-called “Delaware Effect,” or how a Delaware incorporation affects shareholder returns.
A little backstory will set the context: For the past century, Delaware’s constitution has ensured a partisan judicial balance by specifying that no more than a bare majority of judges on the state’s courts may hail from the same political party, the paper noted. That ideological diversity stemming from partisan balance improves decisional quality, the authors added.
But in December 2017, in a case known as Adams v. Carney, a federal district court held that Delaware’s partisan-balance regime violated the First Amendment’s freedom-of-association guarantee by discriminating among judicial candidates based on party affiliation. The case wound its way through the federal courts before the Supreme Court in December 2020 erased the district court’s decision in January 2023, restoring the partisan-balance status.
When Money Talks for Delaware
In their study, Feinstein and Hemel showed that Delaware firms experienced negative abnormal returns on the date of the first decision by the district court in December 2017, when it dismantled the partisan balance, and positive abnormal returns after the Supreme Court ruling which restored that balance. On the date of the district court’s decision, he estimated negative abnormal market returns for Delaware firms (versus for firms incorporated in other states) was approximately 0.3-0.6 percentage points. On the date that the Supreme Court invalidated the district court’s decision, Delaware firms experienced positive abnormal returns of approximately 0.3-1.1 percentage points (again, compared to firms incorporated elsewhere).
“The fact that you don’t see those movements in companies in the same industry that are not incorporated in Delaware strikes me as notable,” Feinstein said. For instance, oil and gas companies incorporated in Delaware have that movement in terms of abnormal returns, whereas the oil and gas companies incorporated elsewhere don’t, he noted.
“Is a movement of around one-half of one percentage point a big deal? It’s not earth-moving, but in an investment environment where it’s very hard to generate alpha, that strikes me as consequential.”— Brian D. Feinstein
“Is movement of around one-half of one percentage point a big deal?” Feinstein continued. “It’s not earth-moving, but in an investment environment where it’s very hard to generate alpha, that strikes me as consequential,” he said. If one were to consider the market cap of public U.S. companies — $68 trillion at last count — one-half or one percentage point of that “is quite a lot of money,” he added.
According to the paper, its findings are the first to bring evidence for the claim that shareholders see a benefit in Delaware’s politically balanced judiciary. It also supports the theory that the state’s unique legal landscape increases the market value of Delaware incorporated firms.
The study sample covered stock prices between 2017 and 2023 of 2,865 Delaware-incorporated companies and 1,424 companies incorporated elsewhere in the U.S. The sample covers 120 trading days before the district court’s initial judgment and 50 trading days after the lawsuit was settled.
The Significance of Partisan Legal Balance
The paper noted that dozens of federal agencies are subject to partisan-balance requirements, including the Federal Trade Commission and the Securities and Exchange Commission. “But [partisan-balance requirements] are less prevalent at the state level, where effective one-party control over all branches of government is more common,” it added.
Delaware is the only state to have a judicial partisan-balance regime built into its constitution. New Jersey has followed “an informal norm of partisan balance” in its supreme court appointments since 1947, and Marion County, Indiana, had a similar regime between 1975 and 2015, the paper noted.
In addition to Delaware’s partisan-balance system, experts say the state’s Court of Chancery is a big reason for its attractiveness as a corporate home. Chancery courts are non-jury courts where judges are picked for their expertise in matters relating to corporate law. Significantly, Republican and Democratic judges in Delaware’s Chancery Court have not treated cases differently along party lines, Feinstein said. “It really is a bipartisan court.”
Sometimes, companies that find themselves embattled in one state find respite in Delaware. Feinstein cited the case of Burbank, Calif.-based Walt Disney Co., which is incorporated in Delaware and has significant operations in Florida. Disney in 2022 opposed Florida’s “Don’t Say Gay” law in support of the LGBTQ community, but it faced considerable heat in the Sunshine State, especially from its governor Ron DeSantis. But when a shareholder sued Disney over its stand, Delaware’s Court of Chancery rejected the lawsuit.
A Rich Body of Case Law
But the presence of a chancery court is not enough to make the cut. A few other states including Mississippi, Tennessee and Wyoming also have separate chancery courts. Low corporate taxes and fees also do not distinguish Delaware from states like Nevada in the market for incorporations.
“If you’re the general counsel of a company and your CEO wants advice on the legal implications of a certain strategy, chances are you can find Delaware cases that are on point.”— Brian D. Feinstein
Delaware stands tall among rivals in that it boasts a big plus the others don’t have: “a rich body of precedent” in corporate law, which brings predictability to companies, the paper stated. “If you’re the general counsel of a company and your CEO wants advice on the legal implications of a certain strategy, chances are you find Delaware cases that are on point,” Feinstein said. “And that’s because there are so many companies incorporated in Delaware for so many generations. It just has this incredible body of case law. Corporate decision-makers can use that rich body of precedent to determine the legal consequence of a wide variety of potential corporate actions.”
Incidentally, Wyoming and Nevada have made some small but smart gains in recent years. Feinstein noted that Wyoming has “done very well” in making itself friendly to crypto and fintech firms, and Nevada has endeared itself to founder-controlled firms.
The Threat of DExit
Delaware’s attractiveness is not unassailable, with speculation of a DExit, or Delaware-exit, as Reuters reported. In 2024, electric car maker Tesla moved out of Delaware to Texas, and President Donald Trump’s social media company Trump Media & Technology and its Truth Social platform also decamped to Florida. Tesla CEO Elon Musk was unhappy after Delaware’s business court in late 2024 denied him a compensation package of $56 billion, while Trump’s company cited “an increasingly litigious environment” in the state.
In January 2025, the Wall Street Journal reported that Facebook parent Meta was also considering leaving Delaware for another state. That triggered a frenzy of action to retain the company. Weeks later, Delaware also enacted a law in March 2025 dubbed Senate Bill 21 that aims to strengthen the state’s attractiveness for corporations, but that has been beset by multiple legal challenges.
Delaware has a lot at stake in ensuring its status as an incorporation destination. The state’s revenue from corporate franchise fees and taxes at $2.2 billion account for a third of its budget, its governor Matt Meyer said in March as he pitched for passage of SB 21.
All said, Feinstein did not see much reason for Delaware to be worried. “In a typical year, fewer than 10 companies will leave Delaware and go elsewhere,” he said. “By contrast, the state attracts tens of thousands of new incorporations each year. Tesla is a very high profile example, but also one with an anomalous set of circumstances. This is a pretty rare event.”
