No CrossRef data available.
Article contents
Judge Ideology and Opportunistic Insider Trading
Published online by Cambridge University Press: 29 February 2024
Abstract
Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.
Although federal judges are the ultimate arbiters of insider trading enforcement, the role of their political ideology in insider trading is unclear. Using the partisanship of judges’ nominating presidents to measure judge ideology, we first document that liberal judges are associated with heavier penalties in insider trading lawsuits than conservative judges. Next, we find that firms located in circuits with more liberal judges have fewer opportunistic insider sales. Cross-sectional analyses show that this deterrent effect is stronger when managers face a higher risk of insider trading lawsuits. Finally, we find that the Securities and Exchange Commission considers judges’ ideology when selecting litigation forums.
- Type
- Research Article
- Information
- Creative Commons
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.- Copyright
- © The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Footnotes
We thank an anonymous reviewer and Mara Faccio (the editor) for constructive suggestions that helped to improve the article. For valuable comments, we also thank Ferhat Akbas (discussant), Giulio Anselmi (discussant), Utpal Bhattacharya, Jonas Heese (discussant), Lorraine Lee (discussant), Luca Lin (discussant), Joe López-Vilaró (discussant), Paul Richardson (discussant), Haoyang Xiong (discussant), participants at the 2021 AAA Annual Meeting, 2021 EFMA Annual Conference, 2021 EFA Conference, 2021 MFA Conference, 2021 MIT Asia Accounting Conference, 2021 Paris December Finance Meeting, 2022 Hawaii Accounting Research Conference, 2023 FARS Midyear Meeting, and seminar participants at the Hong Kong University of Science and Technology and University of Hong Kong. All errors are our own.
References
Agrawal, A., and Jaffe, J. F.. “Does Section 16b Deter Insider Trading by Target Managers?” Journal of Financial Economics, 39 (1995), 295–319.Google Scholar
Akbas, F.; Jiang, C.; and Koch, P. D.. “Insider Investment Horizon.” Journal of Finance, 75 (2020), 1579–1627.CrossRefGoogle Scholar
Alldredge, D. M., and Cicero, D.. “Attentive Insider Trading.” Journal of Financial Economics, 115 (2015), 84–101.CrossRefGoogle Scholar
Allen, S. A. “The Response of Insider Trading to Changes in Regulatory Standards.” Quarterly Journal of Business and Economics, 29 (1990), 47–78.Google Scholar
Altman, E. I. “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589–609.CrossRefGoogle Scholar
Atkins, P. S. Speech by SEC Commissioner: Remarks to the “SEC Speaks in 2008” program of the Practicing Law Institute. U.S. Securities and Exchange Commission. https://www.sec.gov/news/speech/2008/spch020808psa.htm (2008).Google Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
Becker, G. S. “Crime and Punishment: An Economic Approach.” In The Economic Dimensions of Crime. London, UK: Palgrave Macmillan (1968), 13–68.CrossRefGoogle Scholar
Berkman, H.; Koch, P.; and Westerholm, P. J.. “The Other Insiders: Personal Trading by Brokers, Analysts, and Fund Managers.” Review of Asset Pricing Studies, 13 (2023), 481–522.Google Scholar
Bernhardt, D.; Hollifield, B.; and Hughson, E.. “Investment and Insider Trading.” Review of Financial Studies, 8 (1995), 501–543.CrossRefGoogle Scholar
Bhattacharya, U., and Daouk, H.. “The World Price of Insider Trading.” Journal of Finance, 57 (2002), 75–108.CrossRefGoogle Scholar
Billings, M. B., and Cedergren, M. C.. “Strategic Silence, Insider Selling and Litigation Risk.” Journal of Accounting and Economics, 59 (2015), 119–142.CrossRefGoogle Scholar
Bowie, B. J., and Songer, D. R.. “Assessing the Applicability of Strategic Theory to Explain Decision Making on the Courts of Appeals.” Political Research Quarterly, 62 (2009), 393–407.CrossRefGoogle Scholar
Cameron, A. C.; Gelbach, J. B.; and Miller, D. L.. “Bootstrap-Based Improvements for Inference with Clustered Errors.” Review of Economics and Statistics, 90 (2008), 414–427.CrossRefGoogle Scholar
Choi, S. J.; Gulati, M.; and Posner, E. A.. “What Do Federal District Judges Want? An Analysis of Publications, Citations, and Reversals.” Journal of Law, Economics, & Organization, 28 (2012), 518–549.CrossRefGoogle Scholar
Christensen, H. B.; Hail, L.; and Leuz, C.. “Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement.” Review of Financial Studies, 29 (2016), 2885–2924.CrossRefGoogle Scholar
Cline, B. N., and Posylnaya, V. V.. “Illegal Insider Trading: Commission and SEC Detection.” Journal of Corporate Finance, 58(2019), 247–269.CrossRefGoogle Scholar
Cohen, L.; Malloy, C.; and Pomorski, L.. “Decoding Inside Information.” Journal of Finance, 67 (2012), 1009–1043.CrossRefGoogle Scholar
Conley, T.; Gonçalves, S.; and Hansen, C.. “Inference with Dependent Data in Accounting and Finance Applications.” Journal of Accounting Research, 56 (2018), 1139–1203.CrossRefGoogle Scholar
Cornell, B., and Sirri, E. R.. “The Reaction of Investors and Stock Prices to Insider Trading.” Journal of Finance, 47 (1992), 1031–1059.CrossRefGoogle Scholar
Correia, M. M. “Political Connections and SEC Enforcement.” Journal of Accounting and Economics, 57 (2014), 241–262.CrossRefGoogle Scholar
Cox, J. D.; Thomas, R. S.; and Kiku, D.. “SEC Enforcement Heuristics: An Empirical Inquiry.” Duke Law Journal, 53 (2003), 737–779.Google Scholar
Cross, F. B. Decision Making in the US Courts of Appeals. Palo Alto, CA: Stanford University Press (2007).CrossRefGoogle Scholar
Dai, L.; Fu, R.; Kang, J. K.; and Lee, I.. “Corporate Governance and the Profitability of Insider Trading.” Journal of Corporate Finance, 40(2016), 235–253.Google Scholar
DeHaan, E.; Kedia, S.; Koh, K.; and Rajgopal, S.. “The Revolving Door and the SEC’s Enforcement Outcomes: Initial Evidence from Civil Litigation.” Journal of Accounting and Economics, 60 (2015), 65–96.CrossRefGoogle Scholar
Demsetz, H. “Corporate Control, Insider Trading, and Rates of Return.” American Economic Review, 76 (1986), 313–316.Google Scholar
Donelson, D. C.; Kubic, M.; and Toynbee, S.. “The SEC’s September Spike: Regulatory Inconsistency with the Fiscal Year.” Journal of Accounting and Economics, 77 (2024), 101636.CrossRefGoogle Scholar
Dyck, A.; Morse, A.; and Zingales, L.. “Who Blows the Whistle on Corporate Fraud?” Journal of Finance, 65 (2010), 2213–2253.CrossRefGoogle Scholar
Fairfax, L. M. “The Securities Law Implications of Financial Illiteracy.” Virginia Law Review, 104 (2018), 1065–1122.Google Scholar
Fedderke, J. W., and Ventoruzzo, M.. “Do Conservative Justices Favor Wall Street: Ideology and the Supreme Court’s Securities Regulation Decisions.” Florida Law Review, 67 (2015), 1211–1280.Google Scholar
Fisch, J. E. “Constructive Ambiguity and Judicial Development of Insider Trading.” Penn Law: Legal Scholarship Repository, 71 (2018), 749–766.Google Scholar
Franke, B.; Huang, A. H.; Li, R. Z.; and Wang, H.. “Securities Law Precedents, Legal Liability, and Financial Reporting Quality.” Review of Finance, 28 (2024), 413–445.Google Scholar
GAO. “Improving Personnel Management Is Critical For Agency’s Effectiveness.” https://www.gao.gov/assets/660/655989.pdf (2013).Google Scholar
Goldie, B. A.; Jiang, C.; Koch, P. D.; and Wintoki, M. B.. “Indirect Insider Trading.” Journal of Financial and Quantitative Analysis, 58 (2022), 2327–2364.CrossRefGoogle Scholar
Goldman, S. Picking Federal Judges: Lower Court Selection from Roosevelt Through Reagan. New Haven, CT: Yale University Press (1999).Google Scholar
Gormley, T. A.; Kaviani, M.; and Maleki, H.. “When Do Judges Throw the Book at Companies? The Influence of Partisanship in Corporate Prosecutions.” Available at SSRN 3513177 (2022).Google Scholar
Heminway, J. M. “Materiality Guidance in the Context of Insider Trading: A Call for Action.” American University Law Review, 52 (2003), 1131–1212.Google Scholar
Heminway, J. M. “Just do it—Specific Rulemaking on Materiality Guidance in Insider Training.” Louisiana Law Review, 72 (2012), 999–1054.Google Scholar
Henderson, M. T.; Jagolinzer, A. D.; and Muller, K. A. III. “Offensive Disclosure: How Voluntary Disclosure Can Increase Returns from Insider Trading.” Georgetown Law Journal, 103(2014), 1275–1306.Google Scholar
Henning, P. J. “What’s So Bad About Insider Trading Law?” Business Lawyer, 70 (2015), 751–776.Google Scholar
Henning, P. J. “Making Up Insider Trading Law as You Go.” Washington University Journal of Law & Policy Introduction, 56 (2018), 101–120.Google Scholar
Hirshleifer, D., and Teoh, S. H.. “Limited Attention, Information Disclosure, and Financial Reporting.” Journal of Accounting and Economics, 36 (2003), 337–386.CrossRefGoogle Scholar
Horwich, A. “The Neglected Relationship of Materiality and Recklessness in Actions Under Rule 10b-5.” Business Lawyer, 55 (2000), 1023–1038.Google Scholar
Huang, A.; Hui, K. W.; and Li, R. Z.. “Federal Judge Ideology: A New Measure of Ex Ante Litigation Risk.” Journal of Accounting Research, 57 (2019), 431–489.Google Scholar
Huddart, S.; Ke, B.; and Shi, C.. “Jeopardy, Non-Public Information, and Insider Trading Around SEC 10-K and 10-Q Filings.” Journal of Accounting and Economics, 43 (2007), 3–36.CrossRefGoogle Scholar
Hume, R. J. How Courts Impact Federal Administrative Behavior. London, UK: Routledge (2009).CrossRefGoogle Scholar
Hutton, I.; Jiang, D.; and Kumar, A.. “Political Values, Culture, and Corporate Litigation.” Management Science, 61 (2015), 2905–2925.CrossRefGoogle Scholar
Jaffe, J. F. “Special Information and Insider Trading.” Journal of Business, 47 (1974), 410–428.CrossRefGoogle Scholar
Jagolinzer, A. D. “SEC Rule 10b5-1 and Insiders’ Strategic Trade.” Management Science, 55 (2009), 224–239.CrossRefGoogle Scholar
Kacperczyk, M., and Pagnotta, E. S.. “Chasing Private Information.” Review of Financial Studies, 32 (2019), 4997–5047.CrossRefGoogle Scholar
Kacperczyk, M., and Pagnotta, E. S.. “Legal Risk and Insider Trading.” Journal of Finance, 79 (2024), 305–355.CrossRefGoogle Scholar
Kedia, S., and Rajgopal, S.. “Do the SEC’s Enforcement Preferences Affect Corporate Misconduct?” Journal of Accounting and Economics, 51 (2011), 259–278.CrossRefGoogle Scholar
Knight, J., and Gulati, G. M.. “Talking Judges.” Duke Law Journal, 67 (2018), 163–173.Google Scholar
Lakonishok, J., and Lee, I.. “Are Insider Trades Informative?” Review of Financial Studies, 14 (2001), 79–111.CrossRefGoogle Scholar
Langevoort, D. C. “Global Securities Regulation After the Financial Crisis.” Journal of International Economic Law, 13 (2010), 799–815.CrossRefGoogle Scholar
Langevoort, D. C. “What Were They Thinking? Insider Trading and the Scienter Requirement.” In Research Handbook on Insider Trading. Cheltenham: Edward Elgar Publishing (2012).Google Scholar
Larcker, D. F.; Lynch, B.; Quinn, P. J.; Tayan, B.; and Taylor, D. J.. “Gaming the System: Three ‘Red Flags’ of Potential 10b5-1 Abuse.” Working Paper, Stanford University (2021).Google Scholar
Leland, H. E. “Insider Trading: Should It Be Prohibited?” Journal of Political Economy, 100 (1992), 859–887.CrossRefGoogle Scholar
Lin, Z.; Sapp, T. R.; Ulmer, J. R.; and Parsa, R.. “Insider Trading Ahead of Cyber Breach Announcements.” Journal of Financial Markets, 50 (2020), 100527.CrossRefGoogle Scholar
Lind, N. S.; Rankin, E. T.; and Harris, G.. Today’s Economic Issues: Democrats and Republicans. Santa Barbara, CA: ABC-CLIO (2016).CrossRefGoogle Scholar
Liu, C., and Yermack, D. “Where Are the Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Subsequent Company Performance.” In Corporate Governance. Berlin, Germany: Springer (2012), 3–28.CrossRefGoogle Scholar
Manne, H. G. “What’s So Bad About Insider Trading?” Challenge, 15 (1967), 14–42.CrossRefGoogle Scholar
Mehta, M. N.; Reeb, D. M.; and Zhao, W.. “Shadow Trading.” Accounting Review, 96 (2021), 367–404.CrossRefGoogle Scholar
Meisner, D. M. “Internal Investigations: An Essential Component to Cooperation in an SEC Inquiry.” Securities Regulation Law Journal, 32(2004), 310–314.Google Scholar
Murdock, C. W. “Janus Capital Group, Inc. v. First Derivative Traders: The Culmination of the Supreme Court’s Evolution from Liberal to Reactionary in Rule 10B-5 Actions.” Denver Law Review, 91 (2014), 369–440.Google Scholar
Neumann, M. G. “Neither Admit Nor Deny: Recent Changes to the Securities and Exchange Commission’s Longstanding Settlement Policy.” Journal of Corporation Law, 40 (2015), 793.Google Scholar
Parsons, C. A.; Sulaeman, J.; and Titman, S.. “The Geography of Financial Misconduct.” Journal of Finance, 73 (2018), 2087–2137.CrossRefGoogle Scholar
Patel, M. S. “Does Insider Trading Law Change Behavior: An Empirical Analysis.” University of California Davis Review, 53 (2019), 447–507.Google Scholar
Patel, V., and Putniņš, T. J.. “How Much Insider Trading Really Happens in Stock Markets?” Available at SSRN 3764192 (2023).Google Scholar
Peirce, H. M. Statement by Commissioner Peirce on In the Matter of Lloyd D. Reed. U.S. Securities and Exchange Commission (2022).Google Scholar
Pinello, D. R. “Linking Party to Judicial Ideology in American Courts: A Meta-Analysis.” Justice System Journal, 20 (1999), 219–254.Google Scholar
Prakash, S. “Our Dysfunctional Insider Trading Regime.” Columbia Law Review, 99 (1999), 1491.CrossRefGoogle Scholar
Pritchard, A. C. “Launching the Insider Trading Revolution: SEC v. Capital Gains Research Bureau.” In Research Handbook on Insider Trading. Cheltenham: Edward Elgar Publishing (2013).Google Scholar
Quigley, K. “The Insider Trading Prohibition Act: A Small Step Towards a Codified Insider Trading Law.” Fordham Journal of Corporate & Financial Law, 26(2021), 183.Google Scholar
Randazzo, K. A. “Strategic Anticipation and the Hierarchy of Justice in US District Courts.” American Politics Research, 36 (2008), 669–693.CrossRefGoogle Scholar
Raymond, N., and Stempel, J.. “U.S. Judge Won’t Rubber-Stamp SAC Insider Trade Decision.” https://www.reuters.com/article/us-sac-charges-hearing/u-s-judge-wont-rubber-stamp-sac-insider-trade-decision-idUSBRE9A40QD20131105 (2013).Google Scholar
Roulstone, D. T. “The Relation Between Insider‐Trading Restrictions and Executive Compensation.” Journal of Accounting Research, 41 (2003), 525–551.CrossRefGoogle Scholar
Schanzenbach, M. M., and Tiller, E. H.. “Strategic Judging Under the US Sentencing Guidelines: Positive Political Theory and Evidence.” Journal of Law, Economics, & Organization, 23 (2007), 24–56.CrossRefGoogle Scholar
Seyhun, H. N. “The Effectiveness of the Insider-Trading Sanctions.” Journal of Law and Economics, 35 (1992), 149–182.CrossRefGoogle Scholar
Soltes, E. Why They Do It: Inside the Mind of the White-Collar Criminal. New York, NY: Public Affairs (2016).Google Scholar
Staudt, N.; Epstein, L.; and Wiedenbeck, P.. “The Ideological Component of Judging in the Taxation Context.” Washington University Law Review, 84 (2006), 1797.Google Scholar
Thevenot, M. “The Factors Affecting Illegal Insider Trading in Firms with Violations of GAAP.” Journal of Accounting and Economics, 53 (2012), 375–390.Google Scholar
Velikonja, U. “Securities Settlements in the Shadows.” Yale Law Journal Forum, 126 (2016), 124.Google Scholar
Waldfogel, J. “The Selection Hypothesis and the Relationship Between Trial and Plaintiff Victory.” Journal of Political Economy, 103 (1995), 229–260.CrossRefGoogle Scholar
White, R. M. “Insider Trading: What Really Protects US Investors?” Journal of Financial and Quantitative Analysis, 55 (2020), 1305–1332.CrossRefGoogle Scholar
Zheng, X. “A Tale of Two Enforcement Venues: Determinants and Consequences of the SEC’s Choice of Enforcement Venue After the Dodd–Frank Act.” Accounting Review, 96 (2021), 451–476.CrossRefGoogle Scholar
Huang et al. supplementary material
Huang et al. supplementary material
File
488.4 KB
You have
Access
Open access