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The Duty to be a Rational Shareholder

David A. Hoffman

Temple University - James E. Beasley School of Law; Cultural Cognition Project at Yale Law School; University of Pennsylvania Law School

Temple University Legal Studies Research Paper No. 2006-02
Minnesota Law Review, Vol. 90, p. 537, 2006

How and when do courts determine that corporate disclosures are actionable under the federal securities laws? The applicable standard is materiality: would a (mythical) reasonable investor have considered a given disclosure important. As I establish through empirical and statistical testing of approximately 500 cases analyzing the materiality standard, judicial findings of immateriality are remarkably common, and have been stable over time. Materiality's scope results in the dismissal of a large number of claims, and creates a set of cases in which courts attempt to explain and defend their vision of who is, and is not, a reasonable investor. Thus, materiality provides an ideal lens through which to examine courts' understanding of behavioral psychology and how the insights of that discipline should inform legal decision making.

Significantly, judges have shifted from standards-based to bright-line tests over time, increasingly imposing on investors a duty to behave in economically rational ways in response to corporate disclosures, or risk losing the benefit of legal protections from securities fraud. From this shift, I derive a duty to act as a rational shareholder, attaching to every investor in the public capital markets. Because experimental evidence suggests that women and minorities have different financial risk preferences than white men, courts' applications of this duty may result in privileging white, male investors at the expense of all others. Finally, the very existence of a duty attaching to mere share ownership has the potential to significantly change the way we evaluate those corporate governance models which assume shareholder passivity.

Number of Pages in PDF File: 76

Keywords: securities law, behavioral law and economics, rationality, materiality, race, gender, duties, reasonable person, disclosure

JEL Classification: A10, A12, A13, C2, K00, K22, K41

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Date posted: April 15, 2005  

Suggested Citation

Hoffman, David A., The Duty to be a Rational Shareholder. Temple University Legal Studies Research Paper No. 2006-02; Minnesota Law Review, Vol. 90, p. 537, 2006. Available at SSRN: http://ssrn.com/abstract=690884

Contact Information

David A. Hoffman (Contact Author)
Temple University - James E. Beasley School of Law ( email )
1719 N. Broad Street
Philadelphia, PA 19122
United States
215-204-0612 (Phone)
Cultural Cognition Project at Yale Law School
127 Wall St
New Haven, CT 06520
United States
University of Pennsylvania Law School ( email )
Philadelphia, PA 19104
United States
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