Judge Ideology and Opportunistic Insider Trading

Abstract

This paper investigates whether and how federal judges’ political ideology affects opportunistic insider trading. Although federal judges are the ultimate arbiters of insider trading enforcement, whether their ideology matters to insiders’ trading decision is unclear because the primary enforcer of illegal insider trading, i.e., the Securities and Exchange Commission (SEC), can prosecute the case through its internal administrative proceedings and that personal trading may be driven by individuals’ behavior heuristics. Using the partisanship of judges’ nominating presidents to measure judge ideology, we find that firms located in circuits with more liberal judges have fewer opportunistic insider sales, suggesting that managers consider judges’ political ideology in their trading decisions. Cross-sectional analyses show that this deterrent effect is stronger when managers face higher litigation risk. We also find that the SEC considers judge ideology when selecting litigation forums. Finally, we validate that liberal judge ideology is associated with heavier penalties in insider trading lawsuits. In summary, this paper contributes to a holistic understanding of legal enforcement in deterring insider trading.

Keywords: Judge ideology; opportunistic insider trading; federal judiciary; Securities and Exchange Commission; forum shopping

JEL Classification: G14, K22, K41, K42