Politicization of the Supreme Court and Firm Value: Evidence from Ruth Bader Ginsburg’s Death

In a recent paper we explore how the partisan composition of the Supreme Court of the United States (SCOTUS) affects the valuation of publicly traded firms. The legal system, and particularly an independent judiciary, is crucial for a well-functioning financial market and economy. The SCOTUS, as the highest court in the United States makes decisions that directly affect businesses, and the overall economy. While the SCOTUS is meant to be apolitical and nonpartisan, the process of appointing justices can introduce political considerations over its composition. Consequently, concerns about the politicization of the Supreme Court have grown. The economic impact of these political considerations is the subject of our study.

We focus on the sudden death of Supreme Court Justice Ruth Bader Ginsburg (RBG) in September 2020—although RBG was known to be chronically ill with cancer, there was no indication of a deterioration in her condition immediately prior to her death. RBG was a prominent liberal justice of the SCOTUS and her death created a clear opportunity to replace her with a conservative justice. RBG’s death therefore signaled a significant shift in the partisan composition of the SCOTUS, which was viewed as ideologically balanced prior to RBG’s death—replacing RBG with a conservative justice would result in a clear 6-3 conservative majority.[1]

The possibility of replacing RBG with a conservative justice was immediately clear when she died because the Presidency and Senate majority were both held by the Republican party. With the 2020 presidential election a mere 45 days away, the continuity of Republican control over the Presidency and Senate, and thus their capacity to nominate a successor for RBG, would have been uncertain had her death occurred any later.

We conduct an event study, specifically looking at Cumulative Abnormal Returns (CARs), which measure the stock market reactions of firms, in a 3-day window around RBG’s death. Our main finding is that the political preferences of firms, as indicated by their donations to Republican candidates through corporate political action committees (PACs), are positively related to CARs around RBG’s death. That is, firms that lean Republican per their political contributions (we term the fraction of total donations made to Republican politicians the Republican Leaning Ratio) exhibit more favorable stock market reactions to the news of a more conservative SCOTUS, as signaled by RBG’s death. Thus, firms with a preference for conservative policies/politicians appear to benefit from a more conservative SCOTUS.[2]

Although there is evidence that changes in the composition of the executive and legislative branches of the United States federal government impact firm value, our findings of an impact of the composition of the judicial branch on firm value are novel. Our findings are especially interesting given prior evidence that the SCOTUS does not behave in a partisan manner with respect to business rulings and that the president has limited influence over the SCOTUS, let alone the fact the SCOTUS is intended to be apolitical and non-partisan.[3]

The positive stock market reaction around RBG’s death for Republican-leaning firms is driven largely by a commonality in political preferences within industries. In particular, we find that the market reaction to RBG’s death is positively related to the average Republican Leaning Ratios of firms within industries. An illustrative example is the fossil fuel industry where firms, which have an average Republican Leaning Ratio of 92%, which saw their stock prices go up by an average of 5% following RBG’s death. This is in line with the expectation that the SCOTUS would weigh in on environmental policy. These expectations culminated in West Virginia v EPA (2022) where the SCOTUS, in a 6-3 decision split between conservative and liberal justices, ruled to limit the EPA’s authority to regulate emissions.

The death of conservative Justice Antonin Scalia in 2016 has some parallels to RBG’s death. Prior to Scalia’s death, the court had a 5-4 conservative majority. With an incumbent Democrat president (Obama), the potential replacement of Scalia with a liberal justice would shift the SCOTUS to a liberal majority (the opposite of RBG’s death). Consistent with this, we find tentative evidence that the stock market reaction around Scalia’s death is lower for Republican-leaning firms. However, unlike RBG’s case where the same party (Republican) controlled the Senate and Presidency, when Scalia died the Senate had a Republican majority, presenting an impediment to appointing a liberal justice. This could explain why the relationship we find between the stock market reaction around Scalia’s death and firms’ Republican Leaning Ratios is statistically weak.

Why might Republican-leaning firms benefit from a more conservative SCOTUS? A finding in our paper that speaks to this question is that Republican-leaning firms domiciled in states that are controlled by a Republican trifecta—a Republican governor and Republican-majority state Senate and House—appear to benefit the most. We believe this reflects the possibility that a more conservative SCOTUS will adjudicate in favor of increased legislative power at the state level, at the expense of federal legislative power (the 2022 Dobbs v Jackson Women’s Health Organization and West Virginia v EPA rulings are prime examples). To the extent that a more conservative SCOTUS increases state rights in ways that cater to Republican policy preferences, firms headquartered in states controlled by Republicans are likely to benefit.

In summary, our paper adds to our knowledge on the economic impact of legal systems and political partisanship. It highlights the significant influence of the SCOTUS on firm value, with partisan considerations playing a role in how businesses are affected by changes in the highest court's composition. The findings further our understanding of the economic consequences of a partisan judiciary.

Tor-Erik Bakke is an Associate Professor of Finance at UIC College of Business Administration, University of Illinois at Chicago.

Hamed Mahmudi is an Assistant Professor of Finance at Lerner College of Business and Economics, University of Delaware.

Aazam Virani is an Assistant Professor of Finance at Eller College of Management, University of Arizona.

Song Zhang is an Assistant Professor of Finance at Lerner College of Business and Economics, University of Delaware.

The authors’ full article can be found here.

Endnotes

[1] Although the SCOTUS had a 5-4 conservative majority prior to RBG’s death, Chief Justice Roberts (conservative) and Justice Brett Kavanaugh (conservative) had sided with the liberal justices on important 5-4 decisions—such as Roberts in Department of Homeland Security v Regents of the University of California and Kavanaugh in Apple v Pepper. According to a New York Times article (July 1, 2022), data from the Supreme Court Database indicate that the first full-term of the six-justice conservative majority following RBG’s replacement is ‘the most conservative Supreme Court in nearly a century,’ which is seen to particularly be a ‘consequence of the…appointment of [conservative] Justice Amy Coney Barrett, who joined the court after the death in 2020 of Justice Ruth Bader Ginsburg.’

[2] While the leak of a draft opinion on the landmark 2022 Dobbs v Jackson Women’s Health Organization ruling (that would effectively undo an almost 50-year precedent set by Roe v Wade) may have further signaled a more conservative SCOTUS, the stock market reaction to the leak is not statistically related to firms’ Republican lean, suggesting the market may have largely priced in the effect of a more conservative SCOTUS when RBG died.

[3] Corroborating our main findings, we also find that the stock market reaction around RBG’s death is negatively correlated with the market reaction to the election of President Joe Biden in 2020—the election of a Democrat president appears to have a mitigating effect on the stock market impact of a more conservative SCOTUS—providing suggestive evidence of the SCOTUS's ideological influence.