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April 30, 2003

What Is Material Information?

By Nina Mehta

Materiality is a term of art. Companies must consider the facts in each situation separately, according to Deborah Meshulam, a partner at business law firm Piper Rudnick in Washington, D.C. Some events, such as a company's decision to merge with its biggest competitor, are clearly material. "Less obvious material calculations can relate to sales trends and things that could be significant in the future but may not be now," Meshulam told Traders Magazine.

The Securities and Exchange Commissions left the definition of material information open.

Nonetheless, Ron Graziano, vice president of Ashton Partners, a Chicago-based investor relations consultancy, says that companies can't take a blanket approach to weighing materiality. The common 10-percent rule is a good guide to materiality, but a company's visibility and market sector also play a role.

For example, if a mature stable lawnmower manufacturer with low media visibility and a solid customer base has a 10 percent earnings surprise, that may not have too big an impact on the firm's stock price, Graziano explains. Conversely, he says, a 10 percent surprise for a storage software provider, covered by 20 sellside analysts, and with a shareholder base that's always changing, is material.