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; Hong Kong University of Science and Technology) have posted Federal Judge Ideology: A New Measure of Ex-Ante Litigation Risk on SSRN. Here is the 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.