The Effect of Conflict Minerals Disclosure on Firm Investment

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act imposed an unprecedented disclosure requirement with a non-financial goal of protecting humans rights. Under this rule, US public firms using conflict minerals (including tin, tantalum, tungsten, and gold) in their production must disclose annually whether the minerals are from certain African countries with human right abuses. While the Securities Exchange Commission, public firms, and researchers have attempted to estimate the compliance costs and potential social benefits of this new mandate, no one has investigated its potential unintended impact on firm managers’ internal decisions. I attempt to fill this gap by investigating the effect of the mandatory conflict minerals disclosure on firm investment, one of the most important managerial decisions in daily operations of a business. To comply with the new disclosure requirement, managers have to exert tremendous effort to investigate their multi-level upstream suppliers and, as a result, gain better visibility into their supply chains. I hypothesize that complying firms, with better supply-chain visibility, would make better investment decisions after the implementation of the rule. I will examine supply-chain-specific investment, measured by relationship investment and mergers and acquisitions with firms in upstream supply chain industries, as well as overall investment to reveal the economic significance of the effects. Second, by analyzing the disclosure contents, I will identify the cross-sectional variation in supply-chain visibility achieved by complying firms. If new knowledge does indeed affect investment, I expect this effect to be stronger for firms that gain a higher visibility from their compliance efforts.