Do Conservative Justices Favor Wall Street: Ideology and the Supreme Court's Securities Regulation Decisions01 Jan 2015
The appointment of Supreme Court justices is a politically-charged process and the "ideology" (or "judicial philosophy") of the nominees is perceived as playing a potentially relevant role in their future decision-making. It is fairly easy to intuit that ideology somehow enters the analysis with respect to politically divisive issues such as abortion and procreative rights, sexual conduct, freedom of speech, separation of church and state, gun control, procedural protections for the accused in criminal cases, governmental powers. Many studies have tackled the question of the relevance of the ideology of the justices or appellate judges on these issues, often finding a correlation between policy preferences and decisions.
This Paper fills a gap in the existing literature examining the correlation between ideology and judicial decision-making in the highly technical area of securities regulation. To put it more provocatively, we address the question if "conservative justices" are more "pro Wall Street", and "liberal justices" more "pro investors." Since the enactment of the securities laws in the 1930s, the Supreme Court has decided a significant number of cases in this field. Even if the regulation of financial markets might seem less politically-charged than some of the issues mentioned above, we argue that there is meaningful room for political ideology and policy preferences in deciding these cases.
The Paper is organized as follows. First we offer a brief overview of the different systems used for the selection of the judiciary, focusing in particular on the appointment of Supreme Court Justices, but considering also other systems. We underline the relevance of political considerations in the selection process, which could influence the ideology of selected judges and justices. We also discuss more analytically the space that judicial interpretation can have in the area of securities regulation, and we summarize the existing literature on the correlation between the ideology of judges and justices and their positions on the bench, including measures of the elusive concept of "ideology".
The core of our study, and its most important contribution, is in the second part. A first section is dedicated to the methodological approach followed in collecting and coding the data used, explaining issues such as the selection of the cases considered for the empirical analysis, and the coding of the decisions and of the position of the justices on the political spectrum. Several interesting and complex issues, and some judgment-calls, are discussed in this part. For example, different authors have taken diverging positions on whether an active market for control and hostile takeovers are beneficial to investors, or whether rigorous insider trading prohibitions are desirable for fostering efficient markets. We take the position that both takeovers and insider trading protect investors, and we coded the cases we examined accordingly.
Finally, we present the major empirical results. Our data confirm that, even using different definitions and measures of "ideology", conservative justices are more "pro Wall Street" and "free markets", and liberal justices are more "pro investors" and "regulated markets", more concerned about market failures, and more in favor of private plaintiffs or government intervention. We also use the data collected to explore other questions. For example, we consider if and how the "pro-market" attitude of the Court correlates with the evolution of some general economic variables (i.e., if in times of economic growth and bullish markets justices tend to be more "free-marketers"). We also examine when justices are more consistent in their decisions in this area, when the Court was more divided, and which Courts of Appeals are more often overruled by the Supreme Court.
Two caveats are important. First, we do not associate any negative implication with the fact that "ideology" plays a role in deciding "hard cases." Obviously this does not in any way imply that the justices distort the law in order to achieve pre-determined policy goals, but simply that, when the law is ambiguous, different and legitimate interpretative approaches and policy considerations might lead to different outcomes. Second, while the data indicate a meaningful correlation, the correlation does not entirely explain the decision-making of the justices, therefore confirming the independence and prestige of the Supreme Court and its members.