Mandated social disclosure: Evidence that investors perceive poor quality reporting as increasing social and political cost exposures

Abstract

Purpose

This paper investigates the market response to the poor quality of reporting on the first mandated set of conflict minerals disclosures in the US setting. The authors examine the reaction for both filing firms at their filing date and non-filing companies at the filing deadline.

Design/methodology/approach

The authors use standard market model methods to capture investor response and test for differences across reactions using comparisons of means and regression models. The authors also code reports for a sub-sample of firms and test for the relation between disclosure and market reactions.

Findings

The authors document a significant negative reaction for both filing and non-filing firms, with the latter group suffering a more negative reaction than the filers. The authors also find more extensive disclosure is associated with less negative market reactions. Finally, the authors provide evidence supporting the argument that the more pronounced reaction for the non-filers is due to concerns with incremental implementation costs for these firms.

Research limitations/implications

The results extend prior research into investor perceptions of exposures to social and political costs. The findings suggest that investors view both poor quality disclosure and lack of response to mandated requirements as increasing such exposures.

Practical implications

The negative market response could be expected to exert additional pressures on companies to better assess and report on conflict mineral exposures in their supply chains.

Social implications

The findings suggest investors pay attention to the corporate response to mandated social disclosure requirements, an important finding as mandates for similar types of disclosure appear to be in the offing.

Originality/value

This study is the first to extend the social and political cost exposure literature to analysis of mandated social disclosures.

Citation

Sankara, J., Patten, D.M. and Lindberg, D.L. (2019), "Mandated social disclosure: Evidence that investors perceive poor quality reporting as increasing social and political cost exposures", Sustainability Accounting, Management and Policy Journal, Vol. 10 No. 1, pp. 208-228. https://doi.org/10.1108/SAMPJ-05-2017-0046