Small Business Judging Judges

We find that shifts toward more liberal (i.e., less probusiness) courts predict reductions in local small business activity. A one-standard-deviation increase in liberal ideology predicts a 1% reduction in firm count relative to bordering counties in different federal court jurisdictions. This effect has more than doubled since 2000 and is particularly pronounced in circuit-years with elevated small business–related federal cases or public attention to the legal environment. The effect manifests predominantly through the exit of young firms, not firm relocations, and coincides with a shift away from litigation-sensitive industries. In summary, we provide the first evidence that small businesses consider judicial ideology, and the accompanying variation in expected litigation costs, when deciding whether or where to operate.

This paper was accepted by Bo Becker, finance.

Supplemental Material: The internet appendix and data files are available at https://doi.org/10.1287/mnsc.2024.08333.