Federal judge ideology: A new measure of ex ante litigation risk

Huang, Allen ; Hui, Kai Wai ; Li, Reeyarn Zhiyang

DOI: https://doi.org/10.1111/1475-679X.12260
URL: https://onlinelibrary.wiley.com/doi/full/10.1111/1...
Additional URL: https://ssrn.com/abstract=3170842
Document Type: Article
Year of publication: 2019
The title of a journal, publication series: Journal of Accounting Research
Volume: 57
Issue number: 2
Page range: 431-489
Place of publication: Hoboken, NJ
Publishing house: Wiley Blackwell
ISSN: 0021-8456 , 1475-679X
Publication language: English
Institution: Business School > Rechnungswesen (Juniorprofessur) (Li 2017-2023)
Subject: 330 Economics
Keywords (English): Securities litigation
Abstract: Drawing on the political theory of judicial decision making, our paper proposes a new and parsimonious ex ante litigation risk measure: federal judge ideology. We find that judge ideology complements existing measures of litigation risk based on industry membership and firm characteristics. Firms in liberal circuits (the third quartile in ideology) are 33.5% more likely to be sued in securities class action lawsuits than those in conservative circuits (the first quartile in ideology). This result is stronger after the U.S. Supreme Court's ruling in the Tellabs case. We next show that the effect of judge ideology on litigation risk is greater for firms with more sophisticated shareholders and with higher expected litigation costs. Furthermore, judicial appointments affect litigation risk and the value of firms in the circuit, highlighting the economic consequences of political appointments of judges. Finally, using our new measure, we document that litigation risk deters managers from providing long‐term earnings guidance, a result that existing measures of litigation risk cannot show.

Dieser Eintrag ist Teil der Universitätsbibliographie.

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