Testing Good Securities Disclosure: Tales of the Reasonable Investor

The reasonable investor test has developed in Australia both in the law of misleading and deceptive conduct in relation to securities and in the enquiry into the materiality of information in the stock market context. The former involves the question of whether a reasonable investor would have been influenced by misleading conduct, whereas the latter involves the question of whether a reasonable investor or person would expect that information would have caused investors to trade or otherwise act (the two issues can clearly be related). The test raises various issues including how it applies to a diverse class and whether it is interchangeable with a market test (the writer argues it is not). The test also exists in the United States and has been raised, but then specifically rejected, by the courts in Ireland. The development of behavioural law and economics leads to the question of whether the test can, or should, be modified in view of the allegedly non-rational attributes of investors. The author argues that the test has sufficient flexibility to accommodate such attributes in appropriate cases.