The Real Effects of Supply Chain Transparency Regulation: Evidence from Section 1502 of the Dodd–Frank Act

• Published date: 01 May 2024
• Author: BOK BAIK,OMRI EVEN‐TOV,RUSSELL HAN,DAVID PARK
• Date: 01 May 2024
• DOI: http://doi.org/10.1111/1475-679X.12530

DOI: 10.1111/1475-679X.12530

Journal of Accounting Research

Vol. 62 No. 2 May 2024

Printed in U.S.A.

The Real Effects of Supply Chain

Transparency Regulation: Evidence

from Section 1502 of the

Dodd–Frank Act

BOK BAIK,∗OMRI EVEN-TOV,†RUSSELL HAN,‡

AND DAVID PARK∗

Received 1 December 2021; accepted 10 January 2024

ABSTRACT

Section 1502 of the Dodd–Frank Act requires SEC-registered issuers to con-

duct supply chain due diligence and submit conf‌lict minerals disclosures

(CMDs) that indicate whether their products contain tantalum, tin, tungsten,

or gold (3TG) sourced from the Democratic Republic of the Congo (DRC)

or its neighboring countries (“covered countries”). Consistent with the rep-

utational cost hypothesis, we f‌ind that heightened public attention to CMDs

increases responsible sourcing. After Section 1502 takes effect, we f‌ind higher

demand for 3TG products processed in certif‌ied smelters, decreased conf‌licts

in covered countries’ mining regions relative to other regions, and reduced

sensitivity of conf‌lict risk to conf‌lict minerals’ price spikes. Finally, we f‌ind

that conf‌licts decrease in Eastern DRC territories with prevalent 3T (tanta-

lum, tin, and tungsten) mines but increase in territories with prevalent gold

mines. Overall, our f‌indings highlight the real effects of enhanced supply

chain transparency regulation.

∗Seoul National University; †University of California, Berkeley; ‡Hong Kong Polytechnic

University, School of Accounting and Finance

Accepted by Valeri Nikolaev. We thank David Aboody, Lily Asia (IBM), Chris Bayer (DI),

Nicolas Berman, Nerissa C. Brown, Samuel Chang, George SheChih Chiu (discussant), Jong-

Hag Choi, Sunhwa Choi, Stacey Soyeon Choy, Darin Christensen (PRG), Hans B Chris-

551

© 2024 The Authors. Journal of Accounting Research published by Wiley Periodicals LLC on behalf of The

Chookaszian Accounting Research Center at the University of Chicago Booth School of Business.

This is an open access article under the terms of the Creative Commons

Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium,

provided the original work is properly cited, the use is non-commercial and no modif‌ications or

adaptations are made.

552 b. baik, o. even-tov, r. han, and d. park

JEL codes: C23, D22, D74, G14, G18, G38, K2, L2, M41, M48, O13, Q34

Keywords: real effects; Dodd–Frank Act; conf‌lict minerals disclosures;

nonf‌inancial disclosure; corporate social responsibility; responsible sourc-

ing; ESG; due diligence; supply chain; resource curse

1. Introduction

The extraction and distribution of Africa’s natural resources have produced

conf‌licts with signif‌icant economic, geopolitical, and humanitarian impli-

cations (U.N. Security Council [2010]).1Many of the region’s vast and

valuable mineral reserves are located in areas with heightened political

volatility and corruption, weak institutional structures and accountability,

and poor social welfare. Scholars have coined a term for this paradox: the

“resource curse” (Auty [1993], Sachs and Warner [1995], Auty [2001], Gyl-

fason [2011]). This curse has been particularly pronounced in the Demo-

cratic Republic of the Congo (DRC), which has been the site of 5.4 million

deaths since 1996 related to conf‌licts over its abundant natural resources

(Chase [2010]).

tensen, Ross Chu, Benjamin Clair (Datastake), Mathieu Couttenier, Michael Dambra, Mick-

ael Daudin (iTSCi), Raphaël Deberdt (RSN), Patricia Dechow, Michael Donohoe, Kimberlyn

George, Kimberly Gianopoulos (GAO), David Godsell, Eliana Gonzalez Torres (DI), Jihae

Hong (PRG), Solomon Hsiang, Iny Hwang, Jinsung Hwang, Nsengiyumva Majune Ignace,

Sun-Moon Jung, Woon-Oh Jung, Benjamin Katz (OECD), Dan Katz (USSD), Chin Kim, Jiho

Kim, Jongha Kim, Jooyun Kim, Pureum Kim, Yoojin Kim, Taeho Ko, Brooke Stearns Lawson

(USAID), Junghoon Lee, Sang-Mok Lee, Woo-Jong Lee, Yong-Gyu Lee, Youngjo Lee, Chris-

tian Leuz, Haotian Li, Fabiana Di Lorenzo (RBA), Michelle Lowry (discussant), Luca Maiotti

(OECD), Ken Matthysen (IPIS), Melody McNeil (USAID), Simmi Mookerjee (discussant),

Kay Nimmo (iTSCi), Shail Pandit (discussant), Duri Park (discussant), Ester Park, Hung-

soo Joshua Park, Sehee Park, Sophia Sohee Park, Sunyoung Park, Alyssa Perkinson (USSD),

Jennifer Peyser (RBA), Itay Saporta, Galit Sarfaty, Guoman She, Jae Yong Shin, Annie Sig-

norelli (Apple), Benjamin Skolnik (USAID), Richard Sloan, Nik Stoop, Hee-Yeon Sunwoo,

Brett Trueman, Agathe Tshimpanga (USAID), Peter Van der Windt, Ryan Vaughan (GAO),

Pilar Velasquez (USLD), Marijke Verpoorten, Jordan Yoo, Aaron Yoon, Young Yoon, Steve

Young, seminar participants at the 2021 and 2022 American Accounting Association An-

nual Meetings, the 2022 Hawaii Accounting Research Conference, the Korean Accounting

Association Conference 2021 and 2022, and the Korean Accounting Information Associa-

tion Conference 2021. We thank the workshop participants at the Hanken School of Eco-

nomics, National University of Singapore, University of Buffalo, University of California, Los

Angeles, University of Michigan, University of Tennessee, Université Paris-Dauphine, Seoul

National University, and Tel Aviv University; the Private-Public Alliance and the OECD Fo-

rums. We also thank Alex Gunwoo Kim, Chanseok Lee, Peter Chanmu Park, Andy Jiarui

Su, Jaeho Yoo, and Sunho Yoo for their valuable research assistance. Bok Baik acknowledges

f‌inancial support from the Institute of Management Research, College of Business Admin-

istration Seoul National University. An online appendix to this paper can be downloaded

at https://www.chicagobooth.edu/jar-online-supplements. In online appendix OA-1, we pro-

vide additional details about the list of experts with whom we held private discussions.

1Conf‌lict minerals are not the only drivers of conf‌licts within our study’s purview. Specif-

ically, the extant literature proposes three additional factors that might prolong conf‌licts in

Africa: weak and poorly functioning political institutions, ethnic fragmentation and polariza-

tion, and endemic poverty (Ross [2004]).

the real effects of supply chain transparency regulation 553

Concerned that the corporate purchase of conf‌lict minerals (i.e., tantalum,

tin, tungsten, and gold, also referred to as 3TG) was exacerbating the hu-

manitarian crisis by f‌inancing the region’s armed groups, the U.S. Congress

enacted Section 1502 as part of the Dodd–Frank Wall Street Reform and

Consumer Protection Act of 2010 (hereafter, “Dodd–Frank Act” or “the

Act”). The f‌inal rule in 2012 required Securities and Exchange Commission

(SEC) issuers to f‌ile by the end of May 2014, and annually thereafter, con-

f‌lict minerals disclosures (CMDs) to indicate whether their products con-

tain conf‌lict minerals originating in the DRC or any of its nine neighboring

countries, collectively referred to as the “covered countries”.2In effect, Sec-

tion 1502 sought to compel greater f‌irm accountability by enhancing supply

chain transparency. Yet, despite the regulation’s importance, there is lim-

ited empirical evidence on whether it has effectively stimulated responsible

sourcing and mitigated conf‌licts.3To f‌ill this void, we investigate whether

and how Section 1502 successfully fulf‌ills its goal of conf‌lict mitigation.

It is ex ante unclear to what extent Section 1502 promotes greater account-

ability in SEC-issuers’ sourcing practices. On the one hand, the section re-

quires companies to conduct due diligence to ascertain if sourced minerals

are linked to conf‌licts in the covered countries.4Totheextentthatthese

disclosures garner attention from investors, consumers, government off‌i-

cials, and other stakeholders, f‌irms may avert reputational costs by embrac-

ing responsible sourcing (Kraft, Valdés, and Zheng [2020], She [2022]).5

Those that fail to comply with Section 1502 in good faith may face liability

under Section 18 of the Securities Exchange Act of 1934, providing fur-

ther incentive to conduct reasonable, good-faith inquiries to determine if

sourced conf‌lict minerals originate from the covered countries.

2Covered countries include the DRC and nine “adjoining countries”. The term “adjoining

countries” is def‌ined in the Dodd–Frank Act as countries that share an internationally recog-

nized border with the DRC. Specif‌ically, these countries are Angola, Burundi, Central African

Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia.

See online appendix OA-2 for a map that identif‌ies the covered countries.

3We def‌ine responsible sourcing as an approach to corporate sourcing and supply chain

management in which an organization actively sources and procures both products and ser-

vices in an ethical, sustainable, and socially conscious way. For a literature review, see Yawar

and Seuring [2017].

4Under the rule, a company must exercise due diligence on the source and chain of custody

of its conf‌lict minerals in accordance with a nationally or internationally recognized due dili-

gence framework, such as the Organization for Economic Co-operation and Development’s

Due Diligence Guidance for Responsible Supply Chains of Minerals from Conf‌lict-Affected

and High-Risk Areas (“OECD Due Diligence Guidance”). See online appendix OA-3 for the

OECD Due Diligence Guidance and online appendix OA-4 for a compliance guide f‌lowchart

summary of Section 1502.

5For example, companies can incur reputational costs (e.g., Christensen et al. [2017]) if

they are perceived to indirectly f‌inance armed groups through their procurement practices,

thereby fueling conf‌licts in the covered countries.