Economic Analysis of Materiality for Canadian Securities Litigation

Reporting issuers who make misrepresentations to the market may face liability under Canadian securities laws if those misrepresentations are found to be material. But how does one determine whether an alleged misrepresentation was material? In some cases, the materiality of an alleged misrepresentation or omission may appear to be obvious on its face. However, in many cases materiality may not be so obvious. This paper describes some of the ways in which economic experts can assist in the objective determination of materiality through the application of finance and valuation theory, along with econometric tools, to provide a relevant and helpful framework. A commonly employed and scientifically objective method for assessing materiality — the event study — is described. In addition, examples are provided of where it may be necessary to go beyond a basic event study analysis to assess the materiality of an alleged misrepresentation or omission within the full economic context in which it was made.