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Drawing on the political theory of judicial decision making, our paper proposes a new and 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. Firms in liberal circuits (the third quartile in ideology) are 33.5% more likely to be sued in securities class action lawsuits than those in conservative circuits (the first quartile in ideology). This result is stronger after the U.S. Supreme Court's ruling in the Tellabs case. We next show that the effect of judge ideology on litigation risk is greater for firms with more sophisticated shareholders and with higher expected litigation costs. Furthermore, judicial appointments affect litigation risk and the value of firms in the circuit, highlighting the economic consequences of political appointments of judges. Finally, using our 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.

We propose a nonparametric test for the exclusion and monotonicity assumptions invoked in instrumental variable (IV) designs based on the random assignment of cases to judges. We show its asymptotic validity and demonstrate its finite-sample performance in simulations. We apply our test in an empirical setting from the literature examining the effects of pretrial detention on defendant outcomes in New York. When the assumptions are not satisfied, we propose weaker versions of the usual exclusion and monotonicity restrictions under which the IV estimator still converges to a proper weighted average of treatment effects.

Over 20 percent of prison and jail inmates in the United States are currently awaiting trial, but little is known about the impact of pretrial detention on defendants. This paper uses the detention tendencies of quasi-randomly assigned bail judges to estimate the causal effects of pretrial detention on subsequent defendant outcomes. Using data from administrative court and tax records, we find that pretrial detention significantly increases the probability of conviction, primarily through an increase in guilty pleas. Pretrial detention has no net effect on future crime, but decreases formal sector employment and the receipt of employment- and tax-related government benefits. These results are consistent with (i) pretrial detention weakening defendants’ bargaining positions during plea negotiations and (ii) a criminal conviction lowering defendants’ prospects in the formal labor market.

This article develops a new test for identifying racial bias in the context of bail decisions—a high-stakes setting with large disparities between white and black defendants. We motivate our analysis using Becker’s model of racial bias, which predicts that rates of pretrial misconduct will be identical for marginal white and marginal black defendants if bail judges are racially unbiased. In contrast, marginal white defendants will have higher rates of misconduct than marginal black defendants if bail judges are racially biased, whether that bias is driven by racial animus, inaccurate racial stereotypes, or any other form of bias. To test the model, we use the release tendencies of quasi-randomly assigned bail judges to identify the relevant race-specific misconduct rates. Estimates from Miami and Philadelphia show that bail judges are racially biased against black defendants, with substantially more racial bias among both inexperienced and part-time judges. We find suggestive evidence that this racial bias is driven by bail judges relying on inaccurate stereotypes that exaggerate the relative danger of releasing black defendants.

Empirical studies on the relationship between shareholder litigation and corporate disclosure obtain mixed results. We develop an economic model to capture the endogeneity between disclosure and litigation. Equilibrium disclosure is determined by two countervailing effects of litigation, a deterrence effect and an insurance effect. We derive four key results. (i) Decreasing litigation risk leads to less disclosure of very bad news, due to a weakening of the deterrence effect, but to more disclosure of weakly bad news, due to a weakening of the insurance effect. (ii) Given a sufficiently large information asymmetry, litigation risk dampens (boosts) overall disclosure of bad news for low (high) litigation risk firms. (iii) Capital markets respond more to the disclosure of bad news than of good news if the deterrence effect is strong, which arises if both insiders’ penalties and litigation risk are high. (iv) In an extension, we highlight real effects of litigation on corporate innovation and establish that innovation first decreases and then increases (strictly decreases) with litigation risk if insiders’ penalties are small (large). We reconcile our findings with results from a large set of U.S.-based empirical studies and make several novel predictions.

We analyze the impact of outdoor temperature on high-stakes decisions (immigration adjudications) made by professional decision-makers (US immigration judges). In our preferred specification, which includes spatial, temporal, and judge fixed effects, and controls for various potential confounders, a 10°F degree increase in case-day temperature reduces decisions favorable to the applicant by 6.55 percent. This is despite judgements being made indoors, “protected ” by climate control. Results are consistent with established links from temperature to mood and risk appetite and have important implications for evaluating the influence of climate on “cognitive output.”

We provide the first large-sample evidence on the behavior and impact of nonpracticing entities (NPEs) in the intellectual property space. We find that, on average, NPEs appear to behave as opportunistic “patent trolls.” NPEs sue cash-rich firms and target cash in business segments unrelated to alleged infringement at essentially the same frequency as they target cash in segments related to alleged infringement. By contrast, cash is neither a key driver of intellectual property lawsuits by practicing entities (e.g., IBM and Intel) nor of any other type of litigation against firms. We find further suggestive evidence of NPE opportunism: targeting of firms that have reduced ability to defend themselves, repeated assertions of lower-quality patents, increased assertion activity nearing patent expiration, and forum shopping. We find, moreover, that NPE litigation has a real negative impact on innovation at targeted firms: firms substantially reduce their innovative activity after settling with NPEs (or losing to them in court). Meanwhile, we neither find any markers of significant NPE pass-through to end innovators, nor of a positive impact of NPEs on innovation in the industries in which they are most prevalent. This paper was accepted by Tyler Shumway, finance.

Over 130,000 juveniles are detained in the United States each year with 70,000 in detention on any given day, yet little is known about whether such a penalty deters future crime or interrupts social and human capital formation in a way that increases the likelihood of later criminal behavior. This article uses the incarceration tendency of randomly assigned judges as an instrumental variable to estimate causal effects of juvenile incarceration on high school completion and adult recidivism. Estimates based on over 35,000 juvenile offenders over a 10-year period from a large urban county in the United States suggest that juvenile incarceration results in substantially lower high school completion rates and higher adult incarceration rates, including for violent crimes. In an attempt to understand the large effects, we found that incarceration for this population could be very disruptive, greatly reducing the likelihood of ever returning to school and, for those who do return, significantly increasing the likelihood of being classified as having an emotional or behavioral disorder.

This research examines the relation between shareholder litigation and corporate social responsibility (CSR). Exploiting exogenous changes in shareholder litigation rights following the staggered adoption of universal demand laws by U.S. states and the Ninth Circuit Court of Appeals’ ruling on securities class action lawsuits, we show that weaker shareholder litigation rights lead to lower CSR scores. Moreover, the relation is stronger for firms facing higher litigation risk, and a decreased CSR score enhances firm value. Our evidence suggests that firms engage in CSR activities partly to reduce shareholder litigation risk ex ante and mitigate its consequences ex post.

This is the first paper to integrate plea bargaining with costly juror effort. Jurors care about achieving a correct verdict, but experience costs in processing trial-relevant information. There are no fully separating equilibria, where only innocent defendants go to trial, or pooling equilibria, where innocent defendants falsely plead guilty. The first result has been found in literature which does not incorporate costly juror attention, and is thus robust to the inclusion of this phenomenon. The second is new (barring schemes involving post-trial review by external bodies) and shows that laws restricting very lenient plea bargains are unnecessary; costly, unverifiable attention combined with the Cho–Kreps intuitive criterion rules such bargains out in equilibrium, regardless of prosecutor preferences. I characterize feasible semi-separating equilibria that a prosecutor can induce. I also characterize the optimum plea offer for different possible prosecutor preferences. There is a tradeoff between court costs, verdict accuracy and the length of plea sentences. The model generates novel testable implications, and helps to resolve a puzzle noted by legal scholars—that defendants going to trial overwhelmingly opt for jury trials over bench trials, while bench trials, in fact, have a higher rate of acquittal. I perform some robustness checks.