Judge Ideology and Opportunistic Insider Trading

62 Pages Posted: 26 Oct 2021 Last revised: 10 Oct 2022

See all articles by Allen Huang

Allen Huang

Hong Kong University of Science and Technology - Department of Accounting

Kai Wai Hui

University of Hong Kong

Yue Zheng

Hong Kong University of Science & Technology (HKUST)

Date Written: October 6, 2022

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

Suggested Citation

Huang, Allen and Hui, Kai Wai and Zheng, Yue, Judge Ideology and Opportunistic Insider Trading (October 6, 2022). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3947898 or http://dx.doi.org/10.2139/ssrn.3947898

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

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

Kai Wai Hui

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Yue Zheng

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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