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

65 Pages Posted: 12 May 2018  

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

Date Written: April 30, 2018

Abstract

Drawing on the political theory of judicial decision making, our paper proposes a 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, and is economically meaningful in predicting litigation occurrence. Firms in more liberal circuits are more likely to be sued in securities class-action lawsuits, and the effect is economically significant. This result is stronger after the U.S. Supreme Court’s ruling in the Tellabs case. We also find that the effect of judge ideology on litigation risk is greater for firms with more sophisticated shareholders and those with higher expected litigation payoffs. We further validate the measure by examining judicial appointments. Finally, using the 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 Class Action Lawsuits, Litigation Risk, Federal Judge, Circuit Court, Judge Ideology, Voluntary Disclosure

JEL Classification: K22, K41, M41, M40

Suggested Citation

Huang, Allen and Hui, Kai Wai and Li, Reeyarn Zhiyang, Federal Judge Ideology: A New Measure of Ex-Ante Litigation Risk (April 30, 2018). 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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