Federal Judge Ideology: A New Measure of Ex-Ante Litigation Risk

74 Pages Posted: 12 May 2018 Last revised: 21 Feb 2019

See all articles by Allen Huang

Allen Huang

Hong Kong University of Science and Technology - Department of Accounting

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting

Reeyarn Zhiyang Li

University of Mannheim - Accounting and Taxation

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Date Written: February 18, 2019

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.

Keywords: Securities Litigation; Litigation Risk; Federal Courts; Judge Ideology

JEL Classification: K22; K40; K41

Suggested Citation

Huang, Allen and Hui, Kai Wai and Li, Reeyarn Zhiyang, Federal Judge Ideology: A New Measure of Ex-Ante Litigation Risk (February 18, 2019). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3170842 or http://dx.doi.org/10.2139/ssrn.3170842

Allen Huang (Contact Author)

Hong Kong University of Science and Technology - Department of Accounting ( email )

LSK Business School Building
HKUST
Clear Water Bay, Kowloon
Hong Kong
+852-23587559 (Phone)

HOME PAGE: http://www.AllenHuang.org

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Reeyarn Zhiyang Li

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany
+49(621)1812286 (Phone)

HOME PAGE: http://accounting.taxation.uni-mannheim.de/en/team/assistant_professors/reeyarn_zhiyang_li/

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