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The Duty to Be a Rational Shareholder

76 Pages Posted: 15 Apr 2005  

David A. Hoffman

University of Pennsylvania Law School; Cultural Cognition Project at Yale Law School


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.

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

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

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:

David Hoffman (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

Cultural Cognition Project at Yale Law School

127 Wall St
New Haven, CT 06520
United States

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