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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
    DOI: 10.1086/467434
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    References listed on IDEAS

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    1. Craswell, Richard, 1996. "Damage Multipliers in Market Relationships," The Journal of Legal Studies, University of Chicago Press, vol. 25(2), pages 463-492, June.
    2. Klein, Benjamin, 1996. "Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships," Economic Inquiry, Western Economic Association International, vol. 34(3), pages 444-463, July.
    3. Polinsky, A Mitchell, 1997. "Are Punitive Damages Really Insignificant, Predictable, and Rational? A Comment on Eisenberg et al," The Journal of Legal Studies, University of Chicago Press, vol. 26(2), pages 663-677, June.
    4. Kahneman, Daniel & Schkade, David & Sunstein, Cass R, 1998. "Shared Outrage and Erratic Awards: The Psychology of Punitive Damages," Journal of Risk and Uncertainty, Springer, vol. 16(1), pages 49-86, April.
    5. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    6. Karpoff, Jonathan M & Lott, John R, Jr, 1993. "The Reputational Penalty Firms Bear from Committing Criminal Fraud," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 757-802, October.
    7. Jonathan M. Karpoff & D. Scott Lee & Valaria P. Vendrzyk, 1999. "Defense Procurement Fraud, Penalties, and Contractor Influence," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 809-842, August.
    8. Mikkelson, Wayne H. & Partch, M. Megan, 1988. "Withdrawn Security Offerings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(2), pages 119-133, June.
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