The Information Content of Mandated Social Disclosures in Corporate Filings of U.S. Public Companies

Abstract

We examine the U.S. capital market’s reaction to mandatory social disclosures. Section 1502 of the Dodd-Frank Law requires U.S. public companies to provide audited information relating to the sourcing and use of conflict minerals from the Democratic Republic of Congo to interrupt the flow of income to the militia to prevent them from abusing the women and children of DRC. A strong reaction ensued from all interested parties. Using cross-sectional regressions and difference-in-difference research design, we find that bid-ask spread increases; trading volume decreases, and price volatility increases for the firms that provide these disclosures for the first time in their public filings. These findings suggest that using SEC’s traditional financial reporting system for social policy disclosures increases information asymmetry in U.S. capital markets, adversely affecting market participants. Our findings are relevant to legislators and regulators considering using financial reporting systems to force socially and foreign policy-motivated information.

Keywords: Conflict Mineral Policy, Section 1502, Dodd-Frank, Information Asymmetry, Bid-Ask Spread