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Managing Supplier Social & Environmental Impacts with Voluntary vs. Mandatory Disclosure to Investors

Firms face new requirements to disclose what they learn about a supplier's social or environmental impacts (e.g., unsafe facilities, use of conflict minerals funding militias, greenhouse gas emissions). This paper shows that such a disclosure-mandate increases the expected profit of a buying firm and also benefits its management, assuming management wishes to increase investors' valuation of the firm. The paper identifies conditions under which a disclosure-mandate results in higher expected impact by the supplier, and provides some evidence suggesting that those conditions are prevalent in reality. A disclosure-mandate deters management from learning about a supplier's impact. The paper evaluates the robustness of these results and obtains additional insights by modeling, first, cooperation among buying firms with a common supplier to learn about and reduce the supplier's impact, and, second, a buying firm's decision to commit to a supplier vs. search for and switch to an alternative supplier with low impact.