For the past century, Delaware’s Constitution has provided that no more than a bare majority of judges on the state’s courts may hail from the same political party. Some scholars and jurists theorize that Delaware’s commitment to a politically balanced judiciary increases the state’s attractiveness to out-of-state corporations and adds value to Delaware-chartered firms. These claims echo a larger literature in law and the social sciences positing that ideological diversity improves decisional quality. Recently, a series of federal court decisions in the case of Adams v. Carney put these claims to the test. In December 2017, a federal district court held that Delaware’s partisan balance regime violates the First Amendment’s freedom-of-association guarantee because it discriminates among judicial candidates based on party affiliation. In December 2020, the U.S. Supreme Court vacated the lower court decision and restored Delaware’s scheme. The Adams litigation—which generated a series of exogenous shocks to Delaware’s legal regime—enables assessment of the value of partisan balance. If a politically balanced judiciary truly does add value to Delaware-chartered corporations, then the share prices of Delaware firms should have declined in the wake of the December 2017 district court decision and should have risen in response to the December 2020 Supreme Court ruling.
This study is the first to examine how equity markets responded to key decisions in the Adams litigation. Applying a range of model specifications, we find that Delaware firms experienced negative abnormal returns on the date of the district court decision and positive abnormal returns on the date of the Supreme Court’s ruling. These findings—supplemented by results from other key dates in the Adams litigation—are broadly consistent with the theory that a politically balanced judiciary adds value to Delaware-chartered firms.
We conclude by considering the implications of our results for two larger debates in legal scholarship: the debate over partisan balance requirements for federal courts and the debate over Delaware’s dominance in the interstate market for corporate charters. As for the former, our results provide the first revealed-preference evidence that relevant stakeholders assign positive value to partisan balance requirements for adjudicative bodies—a finding that potentially bolsters the arguments of scholars and politicians who want to extend similar requirements to U.S. Supreme Court justices. As for the latter, our results suggest that Delaware’s commitment to a politically balanced judiciary accounts for a nontrivial component of the so-called “Delaware effect”—the share-price boost observed in some studies for firms that reincorporate in the state. In the interjurisdictional market for corporate charters, Delaware’s judicial partisan balance requirements give the state a potentially significant competitive advantage vis-à-vis rivals that lack similar provisions.