The Supreme Court’s decision in Trump v. Slaughter strips independent agencies of removal protections that made regulatory policy predictable across administrations. In new research, Brian Feinstein and Daniel Hemel find that equity markets assign real value to precisely that kind of insulation.
On June 29, the Supreme Court held in Trump v. Slaughter that the president may remove the heads of independent regulatory commissions at will, invalidating for-cause removal protections for the Federal Trade Commission and dozens of other regulatory agencies. Chief Justice John Roberts, writing for a 6–3 majority, declared that “[s]ubordinates who exercise the President’s power are subject to removal by him.” With that sentence, the Court dismantled the legal architecture that had helped insulate these agencies from direct presidential control.
Much of the commentary on Slaughter has focused on constitutional theory. Less attention has been paid to a more practical question: what are the likely economic consequences of the Court tethering formerly independent regulators to the White House. As it happens, we have indirect evidence concerning one group of economic actors—investors—and it suggests that they may not welcome what the Court has wrought.
A natural experiment in judicial insulation
In a recent article in the Northwestern University Law Review, we studied a rare event: an external shock to a legal regime designed to dampen the influence of partisan politics in government decision-making. For more than a century, Delaware’s constitution has required partisan balance on state courts: no more than a bare majority of judges may be affiliated with the same political party. Delaware’s judiciary is no ordinary state bench. More than 60% of publicly traded companies in the United States are chartered in Delaware, and its courts are the de facto national tribunals for disputes over mergers, fiduciary duties, and corporate governance. Prominent jurists and scholars have long claimed that the state’s constitutional commitment to a politically balanced judiciary is part of what makes a Delaware charter attractive to corporations.
That claim was difficult to test until a retired lawyer and unaffiliated voter named James Adams sued. By conditioning eligibility for judicial office on political-party affiliation and thereby excluding unaffiliated voters like him from consideration, he argued, Delaware violates his First Amendment right to free assembly. Adams’s lawsuit received little attention until December 2017, when a federal district court agreed and invalidated Delaware’s partisan-balance regime. Then, three years later, the U.S. Supreme Court in effect dismissed the case for lack of standing, thus restoring the state’s partisan-balance requirements. Both rulings were plausibly exogenous shocks to a structural feature of Delaware law, which is precisely what an event study needs.
The results were striking. On the day the district court invalidated Delaware’s partisan-balance requirements, Delaware-incorporated firms experienced statistically significant abnormal negative returns of roughly 0.3-0.6 percentage points, reflecting reduced confidence in their ability to generate future cash flows. On the day the Supreme Court restored the regime, those firms saw statistically significant positive abnormal returns of roughly 0.3-1.1 percentage points. The effects were concentrated among small- and mid-cap companies, the firms for which the costs of switching to another state of incorporation loom largest, and which therefore may place the greatest value on credible, durable judicial commitments. The revealed preference of equity investors, in other words, is that stability on adjudicative bodies is worth real money.
Why investors value balance
Why would investors care whether judges (or regulatory commissioners) come from both parties? Three potential mechanisms stand out.
First, partisan balance moderates outcomes. When a multi-member body must include members of both parties, its median member is the most conservative Democrat or the most liberal Republican—a far narrower ideological band than when a president or governor can stock a body entirely with co-partisans. Empirical studies of judicial behavior confirm that three-judge panels with a mix of Republican and Democratic appointees produce less ideologically extreme decisions than single-party panels.
Second, balance requirements guard against abrupt swings in the composition of multi-member bodies with each election. This is less of a concern for Delaware’s judiciary, and may even cut in the other direction: an all-Democrat bench (the likely alternative without partisan-balance requirements in deep-blue Delaware) is presumably more predictable than an ideologically diverse one. With the presidency ping-ponging between Republicans and Democrats, however, partisan-balance requirements can slow the pace of change on regulatory commissions around presidential transitions.
Third, balance requirements ensure that minority-party members will be available to alert powerful outside groups—courts, Congress, media, and the general public—that a commission majority has deviated from the ordinary course and needs to be reigned in. That monitoring function lowers the cost to outside actors of checking extreme actions by the commission.
All three channels promote stable, predictable policy outcomes. That legal predictability, in turn, encourages economic activity. Legal scholars posit that uncertainty about future legal rules is a risk that rational actors price into investment decisions. Predictable rules thus lower the cost of contracting and capital formation. Of course, the basic insight that greater predictability encourages economic activity isn’t limited to legal scholarship; Nobel Prize-winning economists F.A. Hayek, Douglass North, and Ben Bernanke, writing in registers ranging from political philosophy to investment theory, reached the same conclusion. The empirical literature points in the same direction: greater certainty over future policy is associated with increased investment, output, and employment. By contrast, regulated firms underinvest when they anticipate regulatory swings.
From Delaware’s courts to Washington’s commissions
Here is the connection to Trump v. Slaughter. Removal protections, sanctioned by the Court for 91 years until Slaughter, provided a degree of policy continuity on independent regulatory commissions. Firms did not have to predict before Election Day whether their regulators would be Democrats or Republicans after Inauguration Day. Instead, removal protections facilitated more gradual and—at least when commissioners served out their terms—more predictable change.
Removal protections also worked in tandem with partisan-balance requirements. The FTC and thirteen other agencies are subject to both partisan-balance requirements at appointment and, until two weeks ago, removal protections at the back end. (Two other agencies, the Securities and Exchange Commission and National Labor Relations Board, contain one of these structures by statute and the other by convention.) The appointment-side rule ensured that more than one political party was represented on commissions; the removal-side rule ensured that minority commissioners could actually serve out their terms, dissent freely, and provide continuity across administrations.
Slaughter severed that connection. A president can comply with a partisan-balance limitation one day and fire the opposite-party commissioners the next. A partisan-balance requirement without removal protection is a fence with an open gate.
Our Delaware findings provide a window into how investors are likely to greet that world. We found that markets assigned positive value to a state constitutional guarantee of balanced adjudication for corporate disputes. There is little reason to think market participants will be indifferent to the loss of analogous insulation at the agencies that police competition, securities markets, communications, and consumer products.
Several caveats are in order. Securities event studies like ours assume efficient markets and measure investor expectations, not investment, employment, or other facets of the real economy. Further, while our institutional setting (Delaware courts) shares some similarities with federal regulatory agencies, it is plainly distinct. Our study is not replicable for Slaughter itself. Unlike the 2017 district court bombshell in the Delaware litigation, court watchers anticipated the outcome in Slaughter. That means that markets presumably would have priced in much of the effect of the anticipated invalidation of for-cause protections long before the Supreme Court published its opinion.
The price of accountability
The Court framed its decision in Slaughter as a restoration of democratic accountability. The officials who wield executive power should answer to the elected president: “when power is exercised well, the people know whom to thank; when power is exercised poorly, they know whom to blame—and whom to fire.” But accountability of this kind can come at an economic cost, as our research shows.
Tellingly, the Court in Trump v. Cook—decided the same day as Slaughter—declined to extend Slaughter’s logic regarding the unconstitutionality of removal protections to the Federal Reserve. Writing in concurrence, Justice Brett Kavanaugh warned that “leaving that question”—i.e., whether the Fed’s removal protections are constitutional—“open would create significant uncertainty” about the Fed’s status, which “could spark … turmoil in the U. S. and world economies.” In other words, legal uncertainty could have adverse economic effects.
The same can be said, in general terms, for stability-promoting structures at other agencies that regulate economic activity. As our study shows, investors treat one of these structures—partisan balance on Delaware courts—as an asset. The Court has now written a group of those assets—removal protections at many federal agencies—off the books.
Authors’ Disclosures: Hemel served as an expert consultant to counsel for the Governor of Delaware in January 2023, before work on the research project discussed in this post began. The authors report no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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