The Market Response to Mandatory Conflict Mineral Disclosures

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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Notes

  1. 1.

    The DRC has mineral resources comparable to the combined GDP of the United States and Europe (UNEP 2011).

  2. 2.

    https://www.sec.gov/news/press/2010/2010-245.htm.

  3. 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/2010/121510openmeeting.shtml.

  4. 4.

    https://www.sec.gov/rules/final/2012/34-67716.pdf.

  5. 5.

    KPMG (2013) report that 59% of the largest 250 firms in the world provided independent assurance with their sustainability reports.

  6. 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.

  7. 7.

    http://www.conflictfreecampus.org/.

  8. 8.

    http://www.nam.org/Issues/Trade/Conflict-Minerals/NAM-Testifies-before-the-House-Subcommittee-on-International-Monetary-Policy-and-Trade-on-The-Costs-and-Consequences-of-Dodd-Frank-Section-1502/.

  9. 9.

    http://www.nam.org/Issues/Trade/Conflict-Minerals/NAM-Testifies-before-the-House-Subcommittee-on-International-Monetary-Policy-and-Trade-on-The-Costs-and-Consequences-of-Dodd-Frank-Section-1502/.

  10. 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. 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).

  12. 12.

    Examples of such disclosures by firms can be found at https://www.sec.gov/Archives/edgar/data/50,863/000005086314000040/formsd.htm or https://www.sec.gov/Archives/edgar/data/37996/000003799614000028/conflictmineralsreport.htm.

  13. 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. 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. 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. 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).

  17. 17.

    For an example of such sources see the following: https://www.wewear.org/assets/1/7/Louann_Spirito_Where_Can_Conflict_Minerals_Appear_In_Your_Products_FW102313.pdfhttp://3blmedia.com/News/Conflict-Minerals-101-Tin-Tungsten-Tantalum-and-Goldhttp://www.itw.com/about-itw/suppliers/page/en/help-for-suppliers-responding-to-itw-conflict-minerals-request/.

  18. 18.

    https://www.osha.gov/pls/imis/sicsearch.html.

  19. 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. 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. 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.

  22. 22.

    http://deloitte.wsj.com/cfo/2015/05/26/conflict-minerals-rule-a-view-of-ongoing-compliance/.

  23. 23.

    We thank a reviewer for suggesting this alternative explanation.

  24. 24.

    Undocumented analyses show that the mean differences in nine of the 13 performance measures are positive and statistically significant.

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Acknowledgement

We gratefully acknowledge the financial support provided by Brock University. We also thank Nadia Bernaz, Joshua Cutler (Discussant), Jonathan Drimmer, Paul Griffin, Michelle Hanlon (Editor), Nien-he Hsieh, David Lont, Markus Milne, Khalid Nainar, Gordon Richardson, Mark Taylor, Narongsak (Tek) Thongpapanl, Samir Trabelsi, Matthew Wegener, Glen Whelan, an anonymous reviewer and the participants of the 2015 ASAC annual meeting, the 2014 Ontario Universities Accounting Symposium, the 2016 American Accounting Association annual meeting and the 2016 Canadian Academic Accounting Association annual meeting for their insightful comments.

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Appendices

Appendix 1: Timeline of events leading up to the passage and implementation of Section 1502 of the Dodd-Frank Act

E1: May 22, 2008: Senators Samuel Brownback and Richard Durbin introduce a bill called the “Conflict Coltan and Cassiterite Act of 2008” to the Senate Finance Committee. The main objectives of the bill are (1) to prohibit the importation of certain products that contain or are derived from columbite-tantalite or cassiterite mined in or extracted from the DRC, (2) to identify groups that commit human rights crimes under international law and that benefit from mineral extraction in the DRC, and (3) to deny the mineral extraction benefits to such groups, if these benefits result in direct or indirect arms or money transfers to such groups. https://www.govtrack.us/congress/bills/110/s3058.

Confounding News: The bill (a provision) is passed by the Senate as part of a financial reform bill related to the housing crisis and the financial market collapse (Congo Minerals Provision Becomes Part of Financial Bill, New York Times, May 21, 2010).

E2: April 23, 2009: Senators Samuel Brownback, Richard Durbin, and Russ Feingold introduce the “Congo Conflict Minerals Act of 2009” (CCMA) to the Senate Banking, Housing, and Urban Affairs Committee to address the humanitarian crisis in the DRC. The bill requires companies to provide annual reports to the SEC that disclose, among other things, activities involving columbite-tantalite, cassiterite, and wolframite from the DRC. The CCMA declares that the US policy is to promote peace and security in the DRC; to monitor and stop commercial activities involving the natural resources of the DRC (the minerals columbite-tantalite [coltan], cassiterite, wolframite, and gold) that support illegal armed groups and contribute to human rights violations in the eastern region of the DRC; and to develop stronger governance and economic institutions that can facilitate and improve transparency in cross-border trade involving these natural resources in order to reduce exploitation by illegal armed groups and to promote local and regional development. https://www.govtrack.us/congress/bills/111/s891.

Confounding News: (1) The US Treasury announces plans to sell $158 billion in short- and long-term securities (Wall Street Journal, April 24, 2009). (2) Treasury Secretary Timothy Geithner reassures investors that the vast majority of banks have more capital than they need; the statement sends the Dow Jones Industrial Average (DJIA) up 127.83 points or 1.6% (Wall Street Journal, April 22, 2009). (3) A late-day sell-off leaves stocks in the red amid disappointing earnings and renewed concerns about bankruptcy at General Motors. The DJIA drops more than 110 points, or 1.4%, in the last half hour of trading (Wall Street Journal, April 23, 2009).

E3: November 19, 2009: Congressman Jim McDermott (D-Washington) introduces The Conflict Minerals Trade Act of 2009 in the US House of Representatives. The main purpose of the Act is to improve transparency, reduce trade in conflict minerals, and ensure that the trade in minerals from eastern Congo stops financing the world’s deadliest conflict since World War II. It also seeks to raise awareness about the issue in the public and among policy makers. The Act creates a system of audits and import declarations that will help distinguish the goods imported into the US that contain conflict minerals. The resulting transparency will be an important step forward to help break the links between the mineral trade and human rights violations.

The Act demands greater transparency and accountability from companies whose products contain 3TG ores or their derivatives. The US government will identify commercial goods that may contain conflict minerals, approve a list of independent monitoring groups qualified to audit the worldwide processing facilities for these minerals, and eventually restrict the importation of minerals to those processed in the audited facilities. Importers of these goods will have to certify on their customs declarations that their goods “contain conflict minerals” or are “conflict mineral free” based upon this audit system. The audits will determine the mines of origin, verify the chain of custody, and verify the information provided by suppliers through investigations in the DRC and other countries. The Act will also direct the State Department to support multilateral and US government efforts to break the links between the trade in minerals and armed conflict in eastern Congo. This Act will also serve as a useful precedent for other countries to develop legislation to hold to account companies in their jurisdictions that may be fueling the conflict in eastern Congo. https://www.govtrack.us/congress/bills/111/hr4128/text.

E4: May 14, 2010: Representatives from the consumer electronics, automotive, jewelry, and manufacturing industries meet at the State Department. The group discusses steps that can be taken to ensure that their supply chains do not contain conflict minerals that have fueled the ongoing conflict in the DRC.

The Under Secretary of State indicates that the State Department wants to hear about the due diligence work that end-user industries are doing and that the State Department is pleased to hear about the efforts in the electronics industry to address supply chains. A representative of the Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI) states, “Together, the EICC and GeSI will continue to develop a systematic approach to keep our supply chains free of conflict minerals and support legitimate sourcing from the DRC.”

The meeting is part of a larger process initiated by the State Department and other agencies to support multilateral, due diligence guidelines that reduce the illicit exploitation of natural resources, promote legitimate and responsible sourcing from the DRC, emphasize the importance of transparency by the private sector with respect to minerals, and work with all regional and international partners to deter trade in conflict minerals. https://2009-2017.state.gov/r/pa/prs/ps/2010/05/141880.htm.

E5: July 21, 2010: The US Congress passes the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1502 of the Act is a provision related to conflict minerals. Through increased transparency in companies’ sourcing practices, the provision aims to deter the extreme violence and human rights violations in the DRC and neighboring countries funded by the exploitation and trade of certain minerals. The term “conflict mineral” refers to columbite-tantalite, also known as coltan (the metal ore from which tantalum is extracted); cassarite (the metal ore from which tin is extracted); gold; wolframite (the metal ore from which tungsten is extracted); or their derivatives. Additionally, any other mineral or its derivatives can be added if the Secretary of State determines that it is financing conflict in the DRC and/or surrounding countries. Section 1502 instructs the SEC, in consultation with the US State Department, to establish regulations that require certain companies to submit annual descriptions of measures taken to exercise due diligence regarding the source and chain of custody of conflict minerals. https://www.congress.gov/bill/111th-congress/house-bill/04173#major%20actions.

Confounding News: Section 1502 of the Dodd-Frank Act is part of the Wall Street Reform Protection Act, which includes provisions to enhance the asset-backed securitization process, create oversight of credit rating agencies, and provide executive compensation and corporate governance reform. It also includes the Volcker Rule, which aims to reduce systemic risk in the banking industry.

E6: December 15, 2010: The SEC votes unanimously to propose measures, as mandated by the Dodd-Frank Act, which will require reporting issuers to provide new disclosures concerning conflict minerals that originate in the DRC or an adjoining country. The proposed rules will require any issuer for which conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, to disclose in the body of its annual report whether its conflict minerals originate in the DRC or an adjoining country. If so, that issuer will be required to furnish a separate report as an addendum to its annual report that includes, among other items, a description of the measures that the issuer takes to exercise due diligence regarding the source and chain of custody of its conflict minerals. These due diligence measures will include, but not be limited to, an independent private-sector audit of the issuer’s report conducted in accordance with the standards established by the Comptroller General of the United States. Further, any issuer furnishing such a report will be required to certify that it has obtained an independent private-sector audit of its report, to provide the audit report, and to make its reports available to the public on its website. “In adopting this statute, Congress expressed its hope that the reporting requirements of the securities laws will help curb the violence in the eastern Democratic Republic of the Congo,” said SEC Chairman Mary L. Schapiro. “Because expertise about these events does not reside within the SEC, we have drafted these proposed rules carefully to follow the direction of Congress and look forward to the additional insights and perspective from public comments.” Public comments on the proposed rules should be received by the Commission by January 31, 2011. https://www.sec.gov/news/press/2010/2010-245.htm.

Confounding News: (1) Congress passes the most far-reaching tax bill in a decade, thereby averting across-the-board tax increases, enacting new breaks for individuals and businesses, and laying a marker for how Washington might work in an era of divided government (Wall Street Journal, December 16, 2010). (2) The release of the retail sales report pushes stocks to a new two-year high. The Dow Jones Industrial Average rises nearly 48 points. Furthermore, the National Federation of Independent Business reports that its small-business optimism index has risen by 1.5 points in November to 93.2, its highest level since December 2007 (Wall Street Journal, December 15, 2010).

E7: July 15, 2011: The US State Department issues a statement urging companies to begin to exercise due diligence immediately to ensure a viable and conflict-free supply chain. Under the Act the Department is “to provide guidance to commercial entities seeking to exercise due diligence on and formalize the origin and chain of custody of conflict minerals used in their products and on their suppliers to ensure that conflict minerals used in the products of such suppliers do not directly or indirectly finance armed conflict or result in labor or human rights violations.” The Department states, “it is critical that companies begin now to perform meaningful due diligence with respect to conflict minerals. To this end, companies should begin immediately to structure their supply chain relationships in a responsible and productive manner to encourage legitimate, conflict-free trade, including conflict-free minerals sourced from the DRC and the Great Lakes region. Furthermore, the Department specifically endorses the guidance and framework issued by the Organization for Economic Co-operation and Development (OECD) and encourages companies to draw upon this guidance as they establish their due diligence practices. Under this five-step framework, companies should: (1) Establish strong company management systems; (2) Identify and assess risks in the supply chain; (3) Design and implement a strategy to respond to identified risks; (4) Carry out independent third-party audit of supply chain due diligence at identified points in the supply chain; and (5) Report on supply chain due diligence.” https://www.state.gov/documents/organization/168851.pdf.

E8: October 18, 2011: The SEC holds a public roundtable to address the agency’s required conflict mineral rulemaking under Section 1502 of the Dodd-Frank Act. At the roundtable, Chairman Schapiro indicates that the agency has held over 90 meetings and received over 250 comments to date from issuers, nongovernmental organizations (NGOs), and other stakeholders concerned with the proposed rules. In connection with the roundtable, the SEC extends the comment period until November 1, 2011, and it will accept comments related to the issues addressed at the roundtable and those related to Section 1502 rulemaking more broadly. At the roundtable, SEC staff indicate an interest in receiving comments about cost estimates of the proposed rules, particularly the ways in which various possible implementations of the rules will affect issuers’ compliance costs. http://www.gibsondunn.com/publications/Pages/SECHostsRoundtable-ConflictMinerals.aspx.

E9: March 6, 2012: Contrary to recent expectations, the SEC chairman indicates that the final rules on conflict minerals will not be adopted until “the middle of the year” and that the SEC will need more time to complete the rules due to the complexity of the rulemaking and because the nature of the congressionally mandated rules is “so out of the ordinary for the SEC.” She also states that the final rules will “try to give latitude and flexibility in some areas” to help companies comply, and a phase-in period will allow time for supply chain due diligence mechanisms to be developed and implemented. http://www.reuters.com/article/us-minerals-conflict-schapiro-idUSTRE8251DE20120306.

E10: August 22, 2012: The SEC, by a vote of 3 to 2, adopts final rules under the Securities Exchange Act which require the disclosure of “conflict minerals” in an issuer’s supply chain, as mandated by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules mandate that each SEC-reporting issuer that uses conflict minerals that are necessary for the functionality or production of a product that it manufactures or contracts to manufacture must file the new Form SD with the SEC no later than May 31 with respect to the prior calendar year. Since the new Form SD will be filed and not furnished, an issuer will be subject to liability under Section 18 of the Exchange Act for false or misleading statements in the report, unless it can establish that it has acted in good faith and has no knowledge that the statement in question is false or misleading. If an issuer’s conflict minerals originate in those countries, then the issuer is required to submit a conflict minerals report (CMR), as an addendum to Form SD, to the SEC, which includes a description of the measures that it has taken to exercise due diligence regarding the source and chain of custody of the conflict minerals. These measures must include an independent private-sector audit of the report, which is conducted in accordance with standards established by the Comptroller General of the United States. Furthermore, Section 13(p) requires the CMR to include a description of the products manufactured or contracted to be manufactured that are not “DRC conflict free,” the facilities used to process the conflict minerals, the country of origin of the conflict minerals, and the efforts taken to determine the mine or location of origin. https://www.sec.gov/rules/final/2012/34-67716.pdf.

Appendix 2: Description of Variables

3TG USER An indicator variable that equals 1 if the firm belongs to a four-digit SIC code category which manufactures or uses in its production at least one product containing 3TG.

3TG Non-USER An indicator variable that equals 1 if the firm belongs to a four-digit SIC code category which does not manufacture or use 3TG in its production.

ACTION An indicator equal to 1 if the firm discloses in its 10-K and/or 10-Q reports that it is taking measures to be conflict-free and 0 otherwise.

ANALYST The average number of analysts covering the company (obtained from the I/B/E/S database) from January 1, 2008 to December 31, 2013.

ARMGRP A categorical variable that takes a value of “NO” if the company discloses on its Form SD that the proceeds from its conflict minerals do not support armed groups; “UN” if the company discloses that its support of armed groups from conflict minerals is “undeterminable”; and “NI” if the company discloses no information on the support of armed groups.

CAAR is the announcement period cumulative average abnormal returns, which are generated utilizing the Fama–French three-factor model (Fama and French 1993).

CAAR (t− 1, t+1) The three-day (t− 1 to t+1) cumulative average abnormal return over the period from day (t− 1) through day (t+1) relative to the regulatory event announcement day (t0).

CAAR (t0, t+1) The two-day (t0 to t+1) cumulative average abnormal return over the period from day (t0) through day (t+1) relative to the regulatory event announcement day (t0).

CAAR (t0, t+2) The three-day (t0 to t+2) cumulative average abnormal return over the period from day (t0) through day (t+2) relative to the regulatory event announcement day (t0).

CAAR (t− 1, t+2) The four-day (t− 1 to t+2) cumulative average abnormal return over the period from day (t− 1) through day (t+2) relative to the regulatory event announcement day (t0).

CAAR3_AG The aggregate, three-day (t− 1 to t+1) cumulative average abnormal return for the ten announcements related to the passage of the Act.

CAAR3_ED The aggregate, three-day (t−1 to t+1) cumulative average abnormal return around the voluntary disclosures of conflict mineral usage or sourcing.

CAAR3_PRE A proxy for the information lost prior to Form SD disclosures, which is defined as the aggregate, three-day (t− 1 to t+1) cumulative average abnormal return around the announcements of the regulatory interventions that occur in the period prior to Form SD disclosures.

CAAR2_SD The two-day (t0 to t+1) cumulative average abnormal return around the disclosure date of Form SD.

CAAR3_SD The three-day (t− 1 to t+1) cumulative average abnormal return around the disclosure date of Form SD.

CAAR3B_SD The three-day (day t0 through day t+2) cumulative average abnormal return around the disclosure date of Form SD.

CAAR4_SD The four-day (day t− 1 through day t+2) cumulative average abnormal return around the disclosure date of Form SD.

CFSI A categorical variable that takes a value of “YES” if the company is a member of the Conflict-Free Sourcing Initiative (CFSI) and “NO” otherwise. A list of companies that are members of the CFSI in 2013 is obtained from http://www.cfsi.com.

CZONE A categorical variable that takes a value of “YES” if the company discloses mineral sourcing from the CZone on its Form SD; “NO” if it does not source minerals from the CZone; “UN” if the sourcing zone is undeterminable; or “NI” if no information is disclosed regarding the sourcing zone.

DCFSI An indicator variable equal to 1 if the company is a member of the Conflict-Free Sourcing Initiative (CFSI) and 0 otherwise. A list of companies that were CFSI members in 2013 is obtained from http://www.cfsi.com.

DCZONE An indicator variable equal to 1 if the company discloses mineral sourcing from the CZone on its Form SD and 0 otherwise. The data are obtained from Form SD disclosures from EDGAR for the fiscal year 2014. The CZone is defined in Section 1502 of the Dodd-Frank Act as the Democratic Republic of Congo (DRC) and any adjoining country having an internationally recognized border with DRC, including Angola, Burundi, the Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia.

DHRCON An indicator variable equal to 1 if the company has human rights concerns at any time during the 2011–2013 period (as reported in the KLD database) and 0 otherwise.

DRISKMIT An indicator variable equal to 1 if the company launches initiatives to mitigate human rights violation risk and 0 otherwise. The data are obtained from the company’s Form SD filing and its 10-K and 10-Q reports from January 1, 2012, through December 31, 2014.

DSANCTION An indicator variable equal to 1 if the corporate headquarters are located in California, Maryland, or St. Petersburg, Florida, and 0 otherwise. These jurisdictions passed legislation to sanction companies that source minerals from the CZone by excluding them from bidding on state contracts.

DUSE An indicator variable equal to 1 if the company utilizes 3TG minerals and 0 otherwise.

EDISCL An indicator variable equal to 1 if the company discloses information on conflict mineral sourcing or usage prior to the implementation date of the Act in its 10-K and/or 10-Q reports and 0 otherwise.

FORTUNE A categorical variable that takes a value of “YES” if the company is ranked on Fortune’s List of the World’s Most Admired Companies over the 2011–2013 period and “NO” otherwise.

FPSCOR A factor score for financial performance derived from the following 13 financial performance measures: (1) Return on assets (ROA), which is defined as the quarterly net income (COMPUSTAT #45 (NIQ)) divided by average assets over the quarter (COMPUSTAT #44 (ATQ)); (2) Return on equity (ROE), which is defined as the quarterly net income divided by the average shareholder’s equity. Shareholder’s equity is defined as total liabilities plus shareholder’s equity (COMPUSTAT #44) minus total liabilities (#54 (LTQ)); (3) Return on sales (ROS), which is defined as the quarterly net income (NIQ) divided by net sales (COMPSUSTAT #2 (SALEQ); (4) Economic value added (EVA), which is defined as earnings before interest and taxes (EBIT) divided by the average of total assets. EBIT = operating income after depreciation (COMPUSTAT #21 (OIADPQ)) + nonoperating income (expense) (COMPUSTAT #31 (NOPIQ)); (5) Economic value added after depreciation and amortization (EVADA), which is defined as earnings before interest, taxes, depreciation, and amortization (EBITDA) divided by average total assets. EBITDA = OIBDPQ + NOIQ, and OIBDPQ is the operating income before depreciation (COMPUSTAT #21); (6) Earnings per share (basic) (EPS), including extraordinary items (COMPUSTAT #11); (7) Earning quality (QUAEARN) is a measure of earnings quality, which is defined as the net cash flow from operating activities (COMPSTAT #108 OANCFY) divided by net income; (8) Tobin’s Q ratio (TOBQ), which is defined as (Market value + PSTKQ + DLCQ + DLTTQ)/total assets. Market value = common shares outstanding (COMPUSTAT #61) * (COMPUSTAT #14); PSTKQ is the total preferred capital stock (#55); DLCQ is the total debt in current liabilities (#45); and DLTTQ is total long-term debt (#51); (9) Market value added (MVA) is defined as (Market value—Book value of common equity—DLCQ—DLTTQ). The book value of common equity is the COMPUSTAT #59; (10) Earnings growth in EPS (EPSG) over the previous quarter; (11) Sales growth (SALEG) over the previous quarter; (12) Quarterly rate of return (RET), which is defined as the sum of monthly stock returns over the quarter; and (13) Abnormal rate of return (ABRD), which is calculated as follows: First, the differences between monthly stock returns (ret) and value-weighted market returns (VWRETD) for each month of the quarter are obtained. Second, we sum the monthly differences from the first step for the quarter. Then, the sum from the second step is divided by the standard deviation of the monthly returns over the quarter. The data are obtained from COMPUSTAT and cover the period from January 1, 2008, through December 31, 2012.

FRCOST The dollar amount of audit fees plus non-audit fees (obtained from the Audit Analytics database) scaled by total assets (obtained from the COMPUSTAT database) for the year prior to the announcement year.

FRQSCOR A proxy for financial reporting quality, which is defined as the performance-matched discretionary accruals measure described in Kothari et al. (2005).

HRCON A categorical variable that takes a value of “YES” if the company has human rights concerns over the 2011–2013 period (as reported in the KLD database) and “NO” otherwise.

INDUST An indicator variable equal to 1 if the company belongs to groups 6 or 7 of the Fama–French (Fama and French 1997) industry classifications and 0 otherwise. Group 6 = Business Equipment: Computers, Software, and Electronic Equipment, and Group 7 = Telecommunications: Telephone and Television Transmission. A complete list of the 12 industry groups with their associated SIC codes can be obtained from http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_12_ind_port.html

INSTHOLD The percentage of shares held by institutional investors (obtained from the DataStream database) from January 1, 2012 through December 31, 2013.

LOGIT An indicator variable equal to 1 if the company sources its minerals from NCZ and/or the proceeds from minerals outsourcing do not support armed groups, and 0 otherwise.

LSIZE The natural logarithm of total assets for the year prior to the announcement year. Total assets are obtained from the COMPUSTAT database.

NARMGRP An indicator variable equal to 1 if the company discloses on its Form SD that the proceeds from its conflict minerals do not support armed groups and 0 otherwise. The data are obtained from the EDGAR database for the fiscal year 2014.

RISKMIT A categorical variable that takes a value of “YES” if the company launches initiatives to mitigate human rights violation risk and “NO” otherwise.

REPUT A factor score from the following six variables: intangible assets scaled by total assets; advertising expenditures scaled by total revenue; R&D expenditures scaled by total revenue; market-to-book ratio; annual stock volatility; and an indicator variable equal to 1 if the company is on Fortune’s List of the World’s Most Admired Companies over the 2011–2013 period and 0 otherwise.

SANCTION A categorical variable that takes the value of “YES” if the corporate headquarters are located in California, Maryland or St. Petersburg, Florida, and “NO” otherwise.

SPREAD The bid-ask spread, which is defined as the three-year (2011–2013) average of ((Year-end highest closing price—Year-end lowest closing price)/(Year-end highest closing price + Year-end lowest closing price)/2) × 100. The closing prices are obtained from the COMPUSTAT database.

STOVER Share turnover ratio is a proxy for information asymmetry, which is defined as the average trading volume (the total number of shares traded between the announcement date and 150 days prior) divided by the average number of shares outstanding for the period.

Appendix 3: Examples of Firm Concerns Related to the Conflict Minerals Act from Voluntary Disclosures

  1. 1.

    Concerns about Compliance and/or Production Cost Increases: In its 2014 financial statements (10-K report), West Marine Inc. mentions the following: “There are costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes or sources of supply as a consequence of such verification activities.” https://www.sec.gov/Archives/edgar/data/912833/000091283314000003/wmar201310-k.htm.

  2. 2.

    Concerns about Increased Reputational Risks: In its 2014 financial statements, Xilinx Inc. states, “We may face reputational challenges if we are unable to sufficiently verify the origins for all minerals used in our products through the due diligence process we implement. Moreover, we may encounter challenges to satisfy those customers who require that all of the components of our products are certified as conflict free.” https://www.sec.gov/Archives/edgar/data/743988/000074398814000026/xlnx0329201410k.htm.

  3. 3.

    Concerns about Increased Operational Risks: In its 2014 financial statements, Calamp Corp states, “If we cannot guarantee that all products exclude conflict minerals sourced from the DRC, certain number of our customers may discontinue, or materially reduce, purchases of the Company’s products, which could result in a material adverse effect on our results of operations and financial condition may be adversely affected.” https://www.sec.gov/Archives/edgar/data/730255/000120677414001353/calamp_10k.htm.

  4. 4.

    Concerns about Supply Limitations and Increased Prices: In its 2014 financial statements, AAON Inc. reports, “As there may be only a limited number of suppliers offering ‘conflict free’ conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices.” In its 2014 financial statements, Intricon Corp. reports, “The implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in our products.” https://www.sec.gov/Archives/edgar/data/824142/000082414214000015/aaon10-k.htm. https://www.sec.gov/Archives/edgar/data/88790/000089710114000317/intricon140807_10k.htm.

  5. 5.

    Concerns about Legal Liability Risks: In its 2013 financial statements, Oracle Corp. reports, “We endeavor to comply with these environmental and other laws, yet compliance with such laws could increase our product design, development, procurement, manufacturing and administration costs, limit our ability to manage excess and obsolete noncompliant inventory, change our sales activities, or otherwise impact future financial results of our hardware systems business. Any violation of these laws can subject us to significant liability, including fines, penalties and possible prohibition of sales of our products into one or more states or countries.” https://www.sec.gov/Archives/edgar/data/1341439/000119312513272832/d531515d10k.htm.

  6. 6.

    Concerns about Sanctions Risks: In its 2014 financial statements, Volterra Semiconductor Corp. reports, “If we, or the subcontractors that we use, fail to timely comply with such laws, our customers may refuse to purchase our products.” In its 2014 financial statements, Gigoptix Inc. reports, “If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier.” https://www.sec.gov/Archives/edgar/data/1050550/000119312513093890/d444378d10k.htm. https://www.sec.gov/Archives/edgar/data/1432150/000114036114013317/form10k.htm.

  7. 7.

    Concerns about Profitability: In its 2012 financial statements, Standard Microsystems Corp. reports, “Compliance with this legislation will result in additional expense related to expanded monitoring of the Company’s supply chain and could result in the Company restricting or modifying the sources from which it acquires key minerals needed to manufacture its products, which could adversely affect its revenues and profitability.” https://www.sec.gov/Archives/edgar/data/93384/000114036112021066/form10k.htm.

  8. 8.

    Concerns about Supply Chain Verifiability: In its 2014 financial statements, Anadigics Inc. reports, “Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation.” Applied Microcircuits Corp. states that “since our supply chain is complex and some suppliers will not share their confidential supplier information, we may face challenges with our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are ‘conflict free.’ https://www.sec.gov/Archives/edgar/data/940332/000114036114010853/form10k.htm.

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Elayan, F.A., Brown, K., Li, J. et al. The Market Response to Mandatory Conflict Mineral Disclosures. J Bus Ethics 169, 13–42 (2021). https://doi.org/10.1007/s10551-019-04283-9

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Keywords

  • Human rights
  • Dodd-Frank Act
  • Corporate disclosure
  • Conflict minerals
  • Corporate social responsibility