Is Puffery Material to Investors? Maybe We Should Ask Them

Abstract:     
In securities litigation, the puffery doctrine stands for the proposition that vague statements of corporate optimism are not actionable because no reasonable investor would rely on them in deciding whether to purchase or sell securities. In other words, puffery is immaterial as a matter of law. Courts routinely rely on the puffery doctrine to dismiss securities claims pre-trial. However, the doctrine has been the subject of much academic criticism. In order to test who is correct about how investors react to alleged puffery, a group of actual investors was surveyed. The survey results showed that when actual investors were confronted with statements deemed immaterial puffery by courts, anywhere from 33% to 84% of them found the statements to be material. This may well be the first direct empirical support for the assertion that the puffery doctrine is being too liberally applied by judges. The paper goes on to argue that surveys should play a role in materiality determinations in securities litigation similar to the role they already play in Lanham Act cases.

Keywords: securities regulation, puffery

JEL Classifications: K22

Accepted Paper Series