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The Impact of Conflict Minerals Reporting on Cost of Equity Capital

ФИО студента: Matteo Polloni

Руководитель: Angel Barajas

Кампус/факультет: St.Petersburg School of Economics and Management

Программа: Finance (Master)

Оценка: 9

Год защиты: 2021

The attention towards Corporate Social Responsibility (CSR) activities, human rights issues and reducing inequalities between countries has become progressively relevant over the last decades. Dodd Frank Act Section 1502 was adopted in 2012 but became effective only in 2014. It established an innovative compulsory reporting system which requires firms that are listed in the United States for which 3TG minerals are “necessary for the functionality or production” (Dodd-Frank Act, 2010), of their products to disclose to the Security Exchange Commission (SEC) their practices related to Conflict Minerals which are extracted from Democratic Republic of Congo or its neighboring nations (Sankara et al. 2015). The main aims and hopes were to create a humiliation effect on firms, due to the risk of reputational damage (Dalla via and Perego 2018). This thesis analyzes the effects that Conflict Minerals reports may have on the cost of equity of reporting firms. I use a sample of 530 companies actively traded in the United States of America exchange. Those companies published their Conflict Mineral reports and received a compliance score assigned by a not-for-profit organization. I demonstrate the existence of a negative relationship connecting the compliance scores of the conflict minerals reports and company’s cost of equity. To strengthen my findings, I also run two different robustness tests. Secondly my findings reveal the existence of a negative relation between ESG scores and cost of equity in such a particular sample of companies, which operate with conflict minerals. These findings reveal that investors and stakeholders take into consideration non-financial disclosure. Indeed, non-financial disclosure tends to narrow the principle-agent information asymmetries, and at the same time it also decreases the risks related to scandals or environmental disasters. These conditions reduce the risk perceived by shareholders and for this peculiar reason investors accept to invest in the company, requiring a lower return on their investment. Keywords: Cost of equity (COE), Conflict Minerals, CSR, Non-financial disclosure, Dodd Frank Act, Information Asymmetry.

Full text (added August 10, 2021)

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