How does mandated sustainability disclosure about conflict minerals affect supply chain finance?

Abstract

We use the 2010 Dodd-Frank Act, which mandated that firms disclose the use of conflict minerals in their supply chain, to investigate whether and how conflict minerals disclosure (CMD) impacts the trade credit that a firm receives from its suppliers. Using a large sample of U.S. firms from 2014 to 2016, we find that firms that provide more-specific, rather than less-specific, CMD receive 6.45% more trade credit. This finding is consistent with more-specific CMD enhancing firms’ supply chain visibility, as well as reducing suppliers’ adverse selection concerns about lending to socially irresponsible firms. Consistent with the enhanced supply chain visibility channel, we find that the positive association is more pronounced for firms with more product market competition or financial constraints. In keeping with the reduced adverse selection channel, we find a more pronounced positive association for firms with weaker monitoring by non-supplier stakeholders. Finally, we find that firms with more-specific CMD provide less downstream trade credit, suggesting that the reputational benefit gained from disclosing socially responsible sourcing enables these firms to rely less on trade credit to attract or capture customers. Overall, our paper offers novel insight into how mandated sustainability disclosures, specifically CMD, affect supply chain finance.