Judge Ideology and Opportunistic Insider Trading

Abstract

Extant evidence suggests that liberal judges prefer stricter securities enforcement to protect innocent investors. We find that firms located in circuits with more liberal judges perform fewer opportunistic insider sales, consistent with managers taking judges’ political ideology into consideration. This deterrent effect is stronger when insiders are more likely to be sued. The SEC also considers judge ideology when selecting litigation venues. Finally, we validate that liberal judges are associated with heavier penalties in insider trading cases. Overall, we provide the first evidence demonstrating the importance of judicial discretion and judge political ideology in deterring opportunistic insider trading.

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

JEL Classification: G14, K22, K41, K42