Page 95 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes in the Ivey memo. As the Washington Post observed, such punitive damages awards
“send a message to the public at large that the courts are more like a casino than a hall of
justice.”
Undertaking at least part of a benefit-cost analysis and making some judgments regarding
the desirability of safety measures is not unique to these specific cases. For example, the
plaintiffs in another case focused on allegedly faulty door latches in the Chevrolet Blazer.
The plaintiffs claimed that GM estimated a $216 million parts cost and a $700 million
labour cost if a recall was initiated, for a total amount of $916 million. Evidence of an
internal timeline of GM’s cost analysis, which indicated that GM knew of the safety latch
problem and what it would cost to fix it, contributed to a $150 million damage award, of
which $100 million was for punitive damages, in the case of a man paralyzed after his
Blazer crashed. Indeed, even more fundamental efforts by the company to learn about its
products’ dangers, such as crash test results and video tapes of those crash tests, can and
have been used against it in litigation.
These and other cases show that courts split on how to treat defendants’ knowledge of
safety issues. Courts should uniformly incorporate benefit-cost analysis, risk-utility tests,
and balancing efforts into negligence standards. This is the goal of our legal system and
regulatory oversight efforts. In practice, however, undertaking a thorough analysis of the
risks, comparing the risk costs and benefits, and then, in accordance with the result of the
risk analysis, proceeding not to undertake the most vigilant safety measures identified
may severely damage a company if jurors regard this knowledge as grounds for punitive
damages.
This review of cases indicates that juries often regard corporate risk analyses as red flags.
Rather than indicating concern with appropriate safety levels, such risk assessments may
be viewed as an indication of callous disregard for human health. The evidence in the case
analyses is consequently quite consistent with the mock juror evidence.

Question
Discuss the results in details.

Source: http://users.wfu.edu/palmitar/Law&Valuation/chapter%202/2-1-5MalibuCase.htm

4.9 Summary

Corporations are run by people and therefore open to problems associated with their
faulty judgments. Besides, corporations operate in a highly dynamic and competitive
environment, and many operate both nationally and internationally.
As a consequence, the judgment factor still rules investment decisions. Risk can be defined
as the probability that the expected return from the security will not materialise. Every
investment involves uncertainties that make future investment returns risk-prone.
Uncertainties could be due to the political, economic and industry factors.
Risk could be systematic in future, depending on its source.
Beta is a measure of the systematic risk of a security that cannot be averted through
diversification.
Beta is a comparative measure of risk – the risk of an individual stock relative to the
market portfolio of all stocks.

If the security’s returns move more (less) than the market’s returns as the latter changes,
the security’s returns have more (less) volatility (fluctuations in price) than those of the
market.

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