Just Friends? Managers’ Connections to Judges

Abstract

Abstract: We study the impact of social connections between judges and executives on the outcomes of Securities Class Action Litigation (SCAL). Judges who share a social network with a firm’s executives are more likely to dismiss lawsuits against the firm. These connected cases are also resolved much faster and settled for significantly lower amounts. The favorable outcomes cannot be explained by the lower severity of connected cases, or by court, judge, or firm characteristics. Our results are robust to using new judge appointments as a source of exogenous variation in “connectedness”. The expectation of more favorable litigation outcomes has an ex ante effect on connected managers’ disclosure decisions. Connected managers issue more voluntary forecasts that walk up prevailing earnings expectations, particularly over the long term and also those that walk them down over the short term. Our evidence indicates that social connections influence judge impartiality and meaningfully alter litigation outcomes, as well as managers’ disclosure decisions.