Determinants of Stock Market Reaction toward Mandatory CSR Rules Size

1633 Previous studies suggest that companies with bigger size tend to disclose more of CSR information. Bigger company will be more exposed to social and environmental risks, since the company will deal with many parties through its activities and products Hackston Milne, 1996. Bigger companies made themselves to be more politically visible Belkoui Karpik, 1989. Based on that argument, the mandatory CSR law will not affect the companies much as they have bigger size and the experience to perform and report information of CSR beforehand. Thus, it will increase the accuracy of market expectation and lower market surprise Na‘im Rakhman, β000. Smaller companies, on the other hand, do not have such experience and expertise or probably they have never conducted any CSR program before. Therefore, the second hypothesis for this study is: H2: In responding to mandatory CSR implementation bill, the stock market will react more positively to smaller firms whose activities are to deal with or are related to the management of natural resources.

b. Profitability

The implication of CSR legislation may incur additional costs. Companies that have high profitability may not be affected much by such additional cost. The high profitability will supply companies flexibility to manage and report CSR programs Hackston Milne, 1996. 1634 Therefore, more profitable firms are more likely to be able to afford implementing the CSR programs. As such, the third hypothesis in this study is: H3: In response to mandatory CSR implementation bill, the stock market will react more positively to more profitable firms whose activities are to deal with or are related to the management of natural resources.

c. Leverage

δeverage is used as a proxy for firm‘s risks . εandatory CSR implementation law is claimed to provide benefit in the form of ―social and environmental license‖ by maintaining a good relationship with other stakeholders Freeman, 2004. As discussed in preceding section, more companies now implement CSR programs and report it in their annual report. Companies willing to invest in CSRbelieve CSR programs are inline with their business objectives Stigson, 2002 and it may create long term sustainability in their business processes. When a firm creates long term sustainability in their business processes, it is expected that the risk of the firm will also reduce. Therefore, the fourth hypothesis in this study is: