Determining Damages incurred by False Information on the Securities Market

Abstract:

Providing information to the market is one of the most important duties of a listed company on the securities market. If the information on the market is insufficient, false or misleading, the issuer may in most jurisdictions be held liable for the loss caused to the investors. The question of recoverable loss has generally been regarded as highly ambiguous. In this paper it is claimed that the recoverable economic interest is to be understood, as a general rule, as the difference between the realized purchase or sell price and the hypothetical, undistorted price. The prima facie method for computing the difference is the event study methodology, which focuses on daily abnormal returns. From the viewpoint of loss calculation, it is immaterial whether the investor has gained a net profit or loss on the investment. Moreover, the investor's right to compensation for public market disclosure error should be neither hindered nor reduced on the grounds that the liquidation of the investment does not occur or is delayed. However, if the corrective disclosure and the crash subsequent to it are followed by a counter-reaction in the market price, this may crucially delimit the recoverable damage of an investor who still holds the stocks at the moment of the damage claim.