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On the Determinants and Importance of Punitive Damage Awards

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Author Info

  • Karpoff, Jonathan M
  • Lott, John R, Jr

Abstract

We examine several theoretical and empirical issues concerning punitive damage awards and their importance to business. First, we argue that previous justifications of punitive damage awards ignore the role of private contracting and reputation in assuring contractual performance. In the absence of externalities, punitive awards are not necessary to assure contractual performance even when firms face less than a 100 percent probability of being sued for contractual breach. Next, we examine empirically the sizes, determinants, and valuation impacts of punitive awards assessed against publicly held companies. We find that settlement amounts are low compared to jury awards, and punitive awards are highly variable and difficult to explain using characteristics of the lawsuit or defendant company. Supreme Court and legislative actions affecting punitive awards generally have not had systematic impacts on firm values. Specific punitive lawsuits, however, decrease the values of defendant companies by amounts that exceed settlement or jury verdict amounts, indicating that punitive lawsuits impose reputational costs on defendants. Copyright 1999 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 42 (1999)
Issue (Month): 1 (April)
Pages: 527-73

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Handle: RePEc:ucp:jlawec:v:42:y:1999:i:1:p:527-73

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Florian Baumann & Tim Friehe, 2012. "Optimal Damages Multipliers in Oligopolistic Markets," Working Paper Series of the Department of Economics, University of Konstanz 2012-08, Department of Economics, University of Konstanz.
  2. Eric Helland & Jonathan Klick & Alexander Tabarrok, 2005. "Data Watch: Tort-uring the Data," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 207-220, Spring.
  3. Usero, Belén & Fernández, Zulima, 2009. "First come, first served: How market and non-market actions influence pioneer market share," Journal of Business Research, Elsevier, vol. 62(11), pages 1139-1145, November.
  4. Maxim Nikitin & Claudia M. Landeo, 2004. "Split-Award Tort Reform, Firm's Level of Care and Litigation Outcomes," Econometric Society 2004 Latin American Meetings 4, Econometric Society.
  5. Cohen, Mark A. & Miller, Ted R., 2003. ""Willingness to award" nonmonetary damages and the implied value of life from jury awards," International Review of Law and Economics, Elsevier, vol. 23(2), pages 165-181, June.
  6. Steven Shavell, 2005. "Liability for Accidents," NBER Working Papers 11781, National Bureau of Economic Research, Inc.
  7. Thomas J. Miceli & Michael P. Stone, 2010. "The Determinants of State-Level Caps on Punitive Damages: Theory and Evidence," Working papers 2010-25, University of Connecticut, Department of Economics.
  8. Bruce Mizrach & Susan Zhang Weerts, 2006. "Does The Stock Market Punish Corporate Malfeasance? A Case Study of Citigroup," Departmental Working Papers 200601, Rutgers University, Department of Economics.
  9. Armour, John & Mayer, Colin & Polo, Andrea, 2010. "Regulatory Sanctions and Reputational Damage in Financial Markets," CEPR Discussion Papers 8058, C.E.P.R. Discussion Papers.
  10. Paul Sergius Koku & Anique A. Qureshi, 2006. "Analysis of the effects of settlement of interfirm lawsuits," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 307-318.
  11. Hales, Douglas N. & Kroes, James & Chen, Yuwen & Kang, Kyung Woo (David), 2012. "The cost of mindfulness: A case study," Journal of Business Research, Elsevier, vol. 65(4), pages 570-578.
  12. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.

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