On the determinants and importance of punitive damage awards

We examine several theoretical and empirical issues concerning punitive dam age awards and their importance to business. First, we argue that previous justifications of punitive damage awards ignore the role of private contrac ting and reputation in assuring contractual performance. In the absence of externalities, punitive awards are not necessary to assure contractual perf ormance even when firms face less than a 100 percent probability of being s ued for contractual breach. Next, we examine empirically the sizes, determi nants, and valuation impacts of punitive awards assessed against publicly h eld companies. We find that settlement amounts are low compared to jury awa rds, and punitive awards are highly variable and difficult to explain using characteristics of the lawsuit or defendant company. Supreme Court and leg islative actions affecting punitive awards generally have not had systemati c impacts on firm values. Specific punitive lawsuits, however, decrease the values of defendant companies by amounts that exceed settlement or jury ve rdict amounts, indicating that punitive lawsuits impose reputational costs on defendants.