Supply chain sustainability: evidence on conflict minerals

Purpose - – This study aims to examine the economic cost imposed by capital markets of section 1502 of the Dodd-Frank Act of 2010 on conflict minerals (CM). The authors analyse a sample of first-time CM disclosures made by US companies in 2010-2012. Design/methodology/approach - – The authors measure the market response to these disclosures and compare it to the response of a matched control sample of non-disclosers. An overall negative response could arise from regulatory costs, changes in management decision making, or customers' social concerns about CM. An overall positive response could reflect the benefits of disclosure transparency. Findings - – The authors find that the negative effects of the disclosures outweigh any positive effects. The authors also find more limited negative effects for the control sample, since they are likely to be future CM disclosers. Research limitations/implications - – Because companies' balance sheets do not report these negative effects, the results imply that investors price supply chain activities related to CM as an off-balance sheet liability. Practical implications - – The results agree with companies' assertions of a substantial cost to implement the CM provision. The authors estimate an aggregate loss of shareholder value for the sample of $6.5 to $13.1 billion. Social implications - – These results show that regulators' and stakeholders' demands for increased transparency can be costly to shareholders when the disclosures induce changes in management decision making and raise customers' social concerns about supply chain sustainability. Originality/value - – The study is the first to examine the economic effects of companies' initial disclosures about CM under the Dodd-Frank Act of 2010.