An Economic Analysis of Australian Damage Remedies for Misleading Prospectuses: Trade Practices Act versus Corporations Law

Laws that address damages caused by deceptive or misleading prospectuses impact on the incentive issuers face to create such prospectuses, and hence impact on the level of investment. In Australia, it has been proposed to shift from a strict liability regime under s. 52 of the Trade Practices Act to a due diligence regime under the Corporations Law. I argue that due diligence is inferior to strict liability for large firms, but in some cases may be preferred to strict liability for small firms. I conclude that due diligence—as a liability rule—increases the cost and complexity of legal action, rather than being a ‘corporate law simplification’ as intended by the Corporations Law Simplification Task Force. Compared to strict liability, it is more likely to result in greater demand for the services of lawyers and accountants than it is to improve the accuracy of reporting.