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Erschienen in: Journal of Business Ethics 1/2021

12.09.2019 | Original Paper

The Market Response to Mandatory Conflict Mineral Disclosures

verfasst von: Fayez A. Elayan, Kareen Brown, Jennifer Li, Yijia Chen

Erschienen in: Journal of Business Ethics | Ausgabe 1/2021

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Abstract

This paper examines the market response to the events leading up to the passage of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) to explore whether investors value mandatory human rights disclosures of conflict mineral usage. Using a sample of 3639 US registrants from January 1, 2008 to September 30, 2014, we document a significant negative stock market reaction to the passage of the Act. Using a sample of 1206 filers, we also find a negative market reaction to conflict mineral disclosures under the Act. The market reaction is more negative and limited to companies that source their minerals from the DRC and adjoining countries, companies with prior records of human rights violations, and companies with ambiguous disclosures. However, the market appears to reward firms that use risk-mitigation strategies. This paper provides preliminary evidence that the mandatory disclosure of conflict mineral information on Form SD poses a threat to firms’ legitimacy, resulting in a net cost to investors. The results of this study provide economic justification for companies with poor records of conflict mineral sourcing to improve their practices for the purpose of avoiding the high costs that will arise if they are forced to disclose human rights abuses related to conflict mineral use.
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Fußnoten
1
The DRC has mineral resources comparable to the combined GDP of the United States and Europe (UNEP 2011).
 
3
In an open meeting on December 15, 2010, SEC Chairwoman Mary Schapiro and staff acknowledged the SEC’s lack of experience in legislating conflict minerals and other sustainability-related disclosures. http://​www.​sec.​gov/​news/​openmeetings/​2010/​121510openmeetin​g.​shtml.
 
5
KPMG (2013) report that 59% of the largest 250 firms in the world provided independent assurance with their sustainability reports.
 
6
For example, The Enough Project tracks the progress of electronic companies toward responsible and conflict-free supply chains. http://​enoughproject.​org/​press-releases/​intel-hp-rank-highest-conflict-minerals-nintendo-htc-lag-behind.
 
10
The Enough Project verified mineral prices from the Cooperative Minière Artisinaux De Masisi (COOPERAMA) and Mwangachuchu Hizi International (MHI), as well as from interviews with miners in 2013. They report that conflict-free tantalum was sold for between $40 and $45 per kg versus $25 to $35 per kg for untraceable tantalum. Conflict-free tin from Cassiterite sold for $5 to $7 per kg, while tin from conflict zones sold for $1.5 per kg (Bafilemba et al. 2014).
 
11
Although ample sources of minerals can be found outside the CZone, prior to the implementation of the Act, 3TG sourced from CZone was much cheaper (Bafilemba et al. 2014).
 
13
CFSI maintains a list of smelters and refiners that meet the audit standards, thereby assisting firms in and informing investors about mineral sourcing decisions. Their flagship program, the Conflict-Free Smelter Program (CFSP), employs independent, risk-based third-party audits of mineral procurement and smelter/refiner management practices to validate member firms’ compliance with established procedures and international standards.
 
14
The global standards upon which the audit standard is developed include the Organisation for Economic Co-operation and Development (OECD) Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas and the US Dodd-Frank Wall Street Reform and Consumer Protection Act. However, CFSI membership does not guarantee that firms will use the resources that the body offers. Nevertheless, investors might judge that member firms are taking the necessary steps to comply with the Act.
 
15
Our initial search results in 16 events, six of which were not regulatory events. The listing of these 16 events is available upon request.
 
16
“A company is considered to be ‘contracting to manufacture’ a product if it has some actual influence over the manufacturing of that product. This determination is based on facts and circumstances, taking into account the degree of influence a company exercises over the product’s manufacturing” (SEC 2012a).
 
19
For example, Intel Corp belongs to SIC = 3674. Both Intel and all the firms with the SIC code 3674 are classified as 3TG users. If the company/group has no product that utilizes 3TG, then the firm is classified as a 3TG nonuser (e.g., Marriott Intl. Hotels SIC = 7011).
 
20
Notably, such classification involves some degree of subjectivity as to whether the company’s products use 3TG. However, since our intention is to estimate investors’ abilities to differentiate between 3TG users and nonusers, we believe that this process provides a reasonable classification.
 
21
Our sample of 1206 filers is consistent with that reported by Ernst and Young (2014) and Deloitte (2014). These reports indicate that approximately 1300 companies filed Form SD in 2014 and that fewer than 1300 filed in 2015, hence supporting the notion that some companies may not be fulfilling their Form SD filing obligations.
 
23
We thank a reviewer for suggesting this alternative explanation.
 
24
Undocumented analyses show that the mean differences in nine of the 13 performance measures are positive and statistically significant.
 
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Metadaten
Titel
The Market Response to Mandatory Conflict Mineral Disclosures
verfasst von
Fayez A. Elayan
Kareen Brown
Jennifer Li
Yijia Chen
Publikationsdatum
12.09.2019
Verlag
Springer Netherlands
Erschienen in
Journal of Business Ethics / Ausgabe 1/2021
Print ISSN: 0167-4544
Elektronische ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-019-04283-9

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