Specialized Corporate Disclosures and Information Asymmetry in U.S. Capital Markets

The aim of this paper is to investigate the effect of conflict mineral disclosures under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 on the information environment of disclosing firms. The United States Congress shoehorned Section 1502 when passing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Section 1502 requires the U.S. public companies to disclose, in their SEC filings, detailed audited information relating to the sourcing and use of conflict minerals from the Democratic Republic of Congo (DRC) and adjoining countries comprising most of the Central Africa. As clearly stated in Section 1502, the intent of the Congress in requiring U.S. public companies to disclose this information was to achieve a very specific social and a foreign policy goal of cutting funding to the militia in DRC who were committing scores of atrocities on African women and children by forcing them to work in mines yielding conflict minerals. There was a strong reaction from all sides in response to the passing of the conflict mineral section as well as of the SEC Final Rules implementing Section 1502. In this paper, we examine the impact of conflict-mineral disclosures on information asymmetry in the U.S. capital markets. Using cross-sectional regressions and difference-in-difference research design, for our sample of 1,835 firms, we find that for firms making conflict mineral disclosures, the bid-ask spread increases, trading volume decreases, and price volatility increases. These findings suggest that using SEC’s current financial reporting and disclosure regime, which is designed to protect investors, increases information asymmetry and imposes unwarranted and adverse social consequences on market participants. Our findings are of relevance to the SEC and other regulators around the world in the current environment where stakeholders are increasingly demanding corporate social responsibility disclosures.