HKUST-led research shows that judges’ ideological leanings affect the outcomes of insider-trading cases. According to Allen H. Huang, Yue Zheng, and a co-author, liberal judges take an especially strong stance against insider trading, with significant real-world consequences for traders and regulators.

Judge ideology is known to influence securities lawsuits. Being a crime at public expense, insider trading may be seen as a graver charge by liberal judges than by those of a conservative persuasion. However, whether the outcomes of such cases hinge on judges’ beliefs remains uncertain. As the researchers note, “even conservatives do not openly support insider trading”—a practice that also compromises free-market efficiency.

Processing data on 379 cases heard in U.S. circuit courts since 1998, the authors found that monetary penalties were higher in circuits with more judges appointed by Democratic presidents. By inferring judges’ political sympathies from the affiliation of their appointing president, they concluded that “liberal judge ideology is associated with higher costs for defendants in insider trading cases.”

These fines act as a real deterrent: in liberal (vs. conservative) dominated circuits, trades identified as potential insider sales are significantly less common. Interestingly, this difference vanishes for insider purchases, which are harder to prosecute—implying that traders carefully consider the cost of their actions when deciding to illegally exploit insider information.

Liberal judges’ harsh stance is also considered by the Securities and Exchange Commission (SEC). Given the option to prosecute cases in administrative proceedings or courts, the SEC is more likely to choose the latter when defendants reside in liberal court circuits, which are more likely to convict. According to the authors, this finding “reinforces the notion that judges loom over the entire enforcement process.”

These insights into judge partisanship in insider-trading cases will have invaluable implications for legal and political scholars, as well as regulators and the investors they protect.