Supply Chain Sustainability: Evidence on Conflict Minerals

Abstract:     
This study tests hypotheses about the expected economic cost of section 1502 of the Dodd-Frank Reform Act of 2010, which seeks to expand transparency and eliminate trade in U.S. companies’ use of conflict minerals. Conflict minerals refers to minerals mined mostly in the Republic of Congo and adjoining countries to support armed conflict and human rights abuses. We also study conflict minerals as an example of a supply chain activity outside the confines of traditional accounting and reporting that affects investors’ perceptions of company value and sustainability. Based on companies with conflict minerals disclosures (discloser companies) and a size- and industry-matched control sample of non-disclosers, we find that shareholder value decreases for both samples for up to three weeks following the event dates of the discloser companies.

These results support the idea that conflict minerals disclosure engenders changes in company and customer decision making, which adversely affects shareholder value (the endogenic hypothesis). They are not consistent with the alternative hypothesis, that conflict minerals disclosure improves shareholder value through increased transparency. Our findings are also consistent with companies’ claims of a significant cost to implement section 1502. These results have distinct implications for corporate social responsibility disclosure, for they show that legislators’ and stakeholders’ demands for increased social transparency can be highly costly to shareholders when the disclosure rules induce significant changes in management and customer decision making. This should also help stakeholders, legislators, and regulators to be better informed about the cost and relate such cost to the perceived benefits of such changes.

Number of Pages in PDF File: 46

Keywords: Supply chain sustainability, Conflict minerals, Dodd-Frank Reform Act, Section 1502, Off-balance sheet liability

JEL Classification: G14, M41, M45, K22, Q20

working papers series