Federal Judge Ideology: A New Measure of Ex-Ante Litigation Risk

21 March 2018

Law and Economic Workshop – Guest Lunchtime Research Seminar

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. This result is stronger after the U.S. Supreme Court’s ruling in the Tellabs case. We also find that judge ideology’s effect on litigation risk is greater for firms with more sophisticated shareholders as well as those with higher expected litigation payoffs. We further validate the measure using judge appointments. Finally, using the new measure, we document that litigation risk deters managers from providing long-term earnings guidance, a result which existing measures of litigation risk cannot show.

About the Speaker

Professor Kai Wai Hui joined the Faculty of Business and Economics as a tenured Professor in accounting Previous to HKU, he worked at HKUST for 12 years and, before that, at leading (“Big Four”) accounting firms. He has taught in different capacity in undergraduate, graduate and PhD programs in HKU, HKUST and the University of Oregon. His research has been published in leading academic journals such as the Accounting Review, the Journal of Accounting and Economics, Journal of Accounting Research and the Journal of Financial Economics. He has received multiple teaching and research awards, and also holds a professional CPA license (in U.S.).