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On the Determinants and Importance of Punitive Damage Awards

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  • 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.

Suggested Citation

  • Karpoff, Jonathan M & Lott, John R, Jr, 1999. "On the Determinants and Importance of Punitive Damage Awards," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 527-573, April.
  • Handle: RePEc:ucp:jlawec:v:42:y:1999:i:1:p:527-73
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    File URL: http://dx.doi.org/10.1086/467434
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    References listed on IDEAS

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    Cited by:

    1. Robert Cooter & Ariel Porat, 2015. "Disgorgement Damages for Accidents," The Journal of Legal Studies, University of Chicago Press, vol. 44(2), pages 249-276.
    2. Florian Baumann & Tim Friehe, 2015. "Optimal Damages Multipliers in Oligopolistic Markets," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 171(4), pages 622-640, December.
    3. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.
    4. 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.
    5. 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.
    6. Joni Hersch & W. Kip Viscusi, 2004. "Punitive Damages: How Judges and Juries Perform," The Journal of Legal Studies, University of Chicago Press, vol. 33(1), pages 1-36, January.
    7. Thomas J. Miceli & Michael P. Stone, 2013. "The Determinants Of State-Level Caps On Punitive Damages: Theory And Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 31(1), pages 110-125, January.
    8. Yannis Bakos & Chrysanthos Dellarocas, 2011. "Cooperation Without Enforcement? A Comparative Analysis of Litigation and Online Reputation as Quality Assurance Mechanisms," Management Science, INFORMS, vol. 57(11), pages 1944-1962, November.
    9. Thomas A. Eaton & David B. Mustard & Susette M. Talarico, 2005. "The Effects of Seeking Punitive Damages on the Processing of Tort Claims," The Journal of Legal Studies, University of Chicago Press, vol. 34(2), pages 343-369, June.
    10. Gazley, Aaron & Sinha, Ashish & Rod, Michel, 2016. "Toward a theory of marketing law transgressions," Journal of Business Research, Elsevier, vol. 69(2), pages 476-483.
    11. Claudia M. Landeo & Maxim Nikitin, 2006. "Split-Award Tort Reform, Firm's Level of Care, and Litigation Outcomes," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(4), pages 571-600, December.
    12. repec:spr:jecfin:v:41:y:2017:i:4:d:10.1007_s12197-016-9373-7 is not listed on IDEAS
    13. Steven Shavell, 2005. "Liability for Accidents," NBER Working Papers 11781, National Bureau of Economic Research, Inc.
    14. 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.
    15. James Malm & Marcin Krolikowski, 2017. "Litigation risk and financial leverage," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(1), pages 180-194, January.
    16. 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.
    17. 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.
    18. repec:eee:jbfina:v:79:y:2017:i:c:p:57-73 is not listed on IDEAS
    19. 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.
    20. Hales, Douglas N. & Chakravorty, Satya S., 2016. "Creating high reliability organizations using mindfulness," Journal of Business Research, Elsevier, vol. 69(8), pages 2873-2881.
    21. 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.
    22. Stephen J. Choi & Theodore Eisenberg, 2010. "Punitive Damages in Securities Arbitration: An Empirical Study," The Journal of Legal Studies, University of Chicago Press, vol. 39(2), pages 497-546.

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