The information content of mandated social disclosures among U.S. public companies

In this paper, we examine the U.S. capital market's reaction to mandatory social disclosures under Section 1502 of the Dodd-Frank Act. Under this requirement, U.S. public companies are expected to provide audited disclosures on the sourcing and use of conflict minerals from the Democratic Republic of Congo (DRC). This Act aimed to deter the extreme violence and human rights violations in the DRC and adjoining countries that is funded by the exploitation and trade of certain minerals. Using cross-sectional regression and difference-in-difference research designs, we find that the bid-ask spread increases for firms the first time they provide any conflict minerals disclosure (CMD) in their public filings. Additionally, firms with CMDs experience reductions in trading volume and increases in price volatility in the post-disclosure period. These findings suggest that using the Securities and Exchange Commission (SEC)’s traditional financial reporting system for CMDs increases information asymmetry in U.S. capital markets and adversely affects market participants. Our findings are relevant to legislators and regulators considering the use of financial reporting systems to achieve social and foreign policy goals.