What accounts for Delaware’s remarkable dominance in the market for corporate charters? For some influential observers, part of the answer lies in the state’s unique commitment to politically balanced courts. Alone among U.S. states, Delaware requires that only a bare majority of judges on nearly all its state courts hail from the same political party (the “bare-majority limitation”). It also requires the remaining seats on several of its most important courts—including its supreme court and court of chancery—to be filled by members of the other major party (the “other-major-party reservation”). Both partisan balance requirements are enshrined in the Delaware Constitution (although since last year, the state has taken the position that the other-major-party reservation is unenforceable). In practice, these requirements ensure that a roughly equal number of Democratic and Republican judges sit on the state’s courts.

Prominent judges, scholars, and political leaders contend that Delaware’s constitutional commitment to a politically balanced judiciary is a key arrow in the state’s quiver when competing with rival states for incorporations. They point to academic research finding that ideological or partisan balance on multi-member tribunals yields higher-quality outcomes through exposure to diverse arguments, produces more moderate decisions, and enables minority-party members to serve as whistleblowers, attracting the attention of outside actors who can take corrective action if the majority strays too far. Thus, the argument goes, partisan balance may enhance Delaware’s appeal as a state of incorporation. Further, by enshrining judicial partisan balance in its state constitution, Delaware pre-commits to a high-quality corporate law regime, consistent with Roberta Romano’s (1985, 1993) “credible commitment” theory of Delaware’s dominance in corporate chartering. Extending this theory, Ofer Eldar and Gabriel Rauterberg (2023) assert that Delaware enhances the credibility of its commitment to high-quality corporate law by taking “deliberate steps to restrict the influence of political partisanship on the creation of its corporate law.”

1.     Research Design

A series of federal court decisions in the recent Adams v. Carney litigation enables us to test the claim that shareholders value the state’s judicial partisan balance requirements. That case began when retired lawyer and political independent James Adams challenged Delaware’s partisan balance requirements as unconstitutional. He alleged that the requirements violate his First Amendment right to free association because they discriminate based on party affiliation, thus depriving politically unaffiliated individuals of opportunities for judicial appointments. A federal district court agreed in December 2017, invalidating both partisan balance provisions. The Third Circuit affirmed. Three years later, the U.S. Supreme Court effectively erased the district court’s decision when it held that Adams lacked standing to challenge the requirements.

The Adams litigation’s twists and turns offer opportunities to test the claim that part of the value of a Delaware charter is attributable to the state’s partisan balance regime. If that claim is accurate—at least concerning what investors value—then we should expect the share prices of Delaware-incorporated companies to fall after the district court invalidated the state’s partisan balance requirements and to rise after the Supreme Court restored them. Accordingly, we examine stock market responses to the key rulings in Adams to gauge the extent to which investors value these judicial partisan balance requirements. Although we analyze several judicial decisions at different stages of the case, we focus on the two decisions that shifted the status quo. Specifically, we hypothesize that Delaware-incorporated firms experience (1) abnormal negative returns on the date that the district court invalidated Delaware’s partisan balance requirements and (2) abnormal positive returns on the date the Supreme Court tossed the case.

2.     Results

We test these hypotheses in three ways. First, we run a set of securities event studies to detect anomalous fluctuations in share prices for Delaware-incorporated firms on the event dates, relative, in most models, to a pre-event period. Table 1 reports average abnormal returns using four common event study models. Consistent with our hypotheses, all models report abnormal negative returns around the district court’s decision and abnormal positive returns on the Supreme Court’s decision date.

Table 1: Abnormal Returns to Del. Firms on Key Dates in Adams v. Carney[1]

Second, we analyze how the share prices of each firm in our sample—both those incorporated in Delaware and elsewhere—fluctuate on the dates of the district court and Supreme Court decisions. Table 2 reports results from regressing event-day returns on whether a firm is incorporated in Delaware (along with other firm characteristics).

Table 2: Regressing Event-Day Securities Returns on Del. Incorporation[2]

Concerning the district court decision, Models 1 and 2 both feature negative coefficient estimates for the price effect of Delaware incorporation—although the estimate falls short of conventionally accepted levels of statistical significance in Model 2. Regarding the Supreme Court decision, Models 3 and 4 both report positive and statistically significant abnormal returns for Delaware firms on the date that the Supreme Court vacated the lower court’s judgment.

Third, we examine how share prices for both Delaware and non-Delaware firms fluctuate across the 100 trading days surrounding the event date. This strategy enables us to simultaneously compare market behavior on event dates versus other nearby trading dates (as with our first approach) and compare the behavior of Delaware- versus non-Delaware-incorporated firms (as in our second approach). Table 3 reports the results.

Table 3: Regressing Securities Returns on Del. Incorporation and Trading Date[3]

(a)  District Court Decision

(b)  Supreme Court Decision

Once again, these results are consistent with our hypotheses. For the district court decision, the Event Date*Delaware coefficient estimates are negative and statistically significant across all models. That result indicates that, on the day the district court struck down Delaware’s partisan balance requirements, Delaware-incorporated companies declined in value, relative to non-Delaware firms on that date and to Delaware firms on other dates. The positive and statistically significant coefficient estimates for this interaction term on the Supreme Court decision date indicate that Delaware firms received a boost on that date, again relative to other firms and other dates.

3.     Discussion

In summary, when the district court invalidated Delaware’s judicial partisan balance requirements, Delaware-incorporated firms appeared to have experienced negative abnormal returns; when the Supreme Court restored the requirements (at least temporarily), Delaware firms witnessed positive abnormal returns. Notably, these abnormal returns are concentrated among small-cap and mid-cap firms. When we re-run the regression models with value-weighted observations—thereby placing extra weight on the largest-cap firms—we arrive at null results.

We also analyze market returns on six other key dates in the Adams litigation, including the Third Circuit’s affirmance and the Supreme Court’s granting cert. These estimates are all directionally consistent with the hypothesis that judicial actions favoring Delaware are associated with positive effects on positive effects on the share prices of Delaware-incorporated firms, and vice versa (although some estimates here fall short of conventionally accepted levels of statistical significance).

Events after the Supreme Court’s disposition of Adams shed light on the relative weight that investors place on the bare-majority limitation versus the other-major-party reservation. Following the Supreme Court’s decision, Adams took steps to cure his standing defect and filed a second lawsuit. The parties settled this suit by agreeing that Delaware would preserve the bare-majority limitation but not enforce the other-major-party reservation. Interestingly, investors do not appear to have reacted to this news. That non-finding suggests that bare-majority limitations can meaningfully affect the ideological composition of these courts even without other-major-party reservations.

Our results are broadly consistent with the claim that investors value Delaware’s partisan balance requirements, though with the caveat that this unique feature of the state’s legal infrastructure appears to matter most to small- and mid-cap firms. Concededly, differences between Delaware’s political climate and that of other jurisdictions counsel in favor of caution when generalizing from these results to partisan balance requirements on, say, many federal independent regulatory commissions. Nonetheless, our results provide the first revealed-preference evidence that at least one important set of stakeholders—equity investors in publicly traded Delaware firms—assigns positive value to partisan balance on adjudicative bodies, a finding with potential implications beyond the corporate law context.