The Impact of Juror Knowledge of Deductibility and Defendants’ Tax Rates on Punitive Damages Awards: Experimental Evidence

39 Pages Posted: 19 Feb 2019 Last revised: 24 Mar 2021

See all articles by Bryan K. Church

Bryan K. Church

Georgia Institute of Technology - Accounting Area

Karie Davis-Nozemack

Georgia Institute of Technology - Scheller College of Business

Lucien Joseph Dhooge

Georgia Institute of Technology - Scheller College of Business

Shankar Venkataraman

Bentley University - McCallum Graduate School of Business

Date Written: March 24, 2021

Abstract

The US Tax Code allows corporate defendants to treat punitive damages as a deductible expense. Legal scholars argue that tax-unaware jurors fail to recognize that deductibility significantly reduces defendants’ after-tax punishment, leading to an under-punishment problem. They propose that explicitly informing jurors about tax-deductibility could mitigate this problem. We conduct an experiment to test this claim. Compared to a control group of jurors who are told nothing about taxes, jurors who learn about tax-deductibility award higher damages when the defendant’s effective tax rate (ETR) is low, but not when ETR is high. Our results highlight the cost of tax avoidance (low ETRs) for firms in a previously unexamined setting. Our findings suggest that allowing jurors to consider tax-deductibility leads to higher damages only under a narrow set of circumstances, offering limited support for the under-punishment hypothesis. Our results should be of interest to scholars in accounting, law, and public policy.

Keywords: jurors, punitive damages, tax-deductibility, effective tax rates

JEL Classification: K10, M41

Suggested Citation

Church, Bryan K. and Davis-Nozemack, Karie and Dhooge, Lucien Joseph and Venkataraman, Shankar, The Impact of Juror Knowledge of Deductibility and Defendants’ Tax Rates on Punitive Damages Awards: Experimental Evidence (March 24, 2021). Georgia Tech Scheller College of Business Research Paper No. 19-05 https://doi.org/10.2308/JATA-19-007 , Available at SSRN: https://ssrn.com/abstract=3336758 or http://dx.doi.org/10.2139/ssrn.3336758

Bryan K. Church

Georgia Institute of Technology - Accounting Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-3907 (Phone)
404-894-6030 (Fax)

Karie Davis-Nozemack

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://https://www.scheller.gatech.edu/directory/faculty/davis-nozemack/index.html

Lucien Joseph Dhooge

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Shankar Venkataraman (Contact Author)

Bentley University - McCallum Graduate School of Business ( email )

Waltham, MA 02452-4705
United States

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