08.05.2021

Are Judges Like Umpires? Political Affiliation and Business Lawsuits

Political science studies show that judge ideology influences judicial votes in federal courts, with judges appointed by Democratic presidents being more liberal than those appointed by Republican presidents. Although legal doctrine plays an important role in deciding case outcomes, judges are more likely to obey legal doctrine when such doctrine supports their own partisan or ideological policy preferences. Despite the ample evidence of judges’ role in civil rights or liberties cases, it is less clear whether judge ideology plays a significant role in the business lawsuits.

 

Here, we find that securities class-action lawsuits, one of the most common and costly business lawsuits, filed in circuits with more liberal judges, i.e., those appointed by Democratic presidents, have significantly lower dismissal rates and larger settlements, suggesting that judge ideology is a critical driver of judicial decision making and litigation costs. Moreover, we find that shareholders are 33.5% more likely to sue businesses when judge ideology is more liberal (from the first to the third quartile).

 

Management insights: Businesses can use information about judges’ personal characteristics such as ideology, and their past rulings to infer judges’ preference in interpreting laws. Such practices can provide valuable insights on how business can cope with constantly evolving legal requirements.

HUANG, Allen

Associate Dean (UG Programs), Associate Professor
Accounting