and lower market surprise Na’im Rakhman, 2000. Smaller companies, on the other hand, do not have such experience and expertise or probably they never conduct any CSR
program before. Therefore, the first hypothesis for this study is: H
1:
In response to mandatory CSR implementation law, the stock market will react more positively to smaller firms whose activities deal with or related to the management
of natural resources.
b. Profitability
The implication of CSR legislation may incur additional costs. Companies which have high profitability may not be affected much by such additional cost. The high
profitability will provide a company more flexibility to manage and report CSR programs Hackston Milne, 1996. Therefore, more profitable firms are more likely to be able to
afford to implement the CSR programs. As such, the second hypothesis in this study is: H
2
: In response to mandatory CSR implementation law, the stock market will react
more positively to more profitable firms whose activities deal with or related to the management of natural resources.
c. Leverage
Leverage is used as a proxy for firm’s riskiness. Mandatory CSR implementation law is claimed to provide benefit in the form of “social and environment 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 CSR, since they believe CSR programs are inline with their business objectives Stigson, 2002 that 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 third hypothesis in this study is:
H
3:
In response to mandatory CSR implementation law, the stock market will react more positively to higher leverage firms whose activities deal with or related to the
management of natural resources.
d. Age
The relationship between the age of company and the market reaction toward CSR legislation can be seen from two aspects, which are political visibility and CSR
experience. The older company age, the more political visibility the company has Belkoui and Karpik, 1989. The company with political visibility is expected to
performed more CSR programs than the company which is not. On the other hand, the older companies are expected to have more experience in performing CSR, so when CSR
programs become mandatory they are relatively prepared than the newer companies. Thus, the fourth hypothesis on this study is:
H
4:
In response to mandatory CSR implementation law, the stock market will react more positively to older firms whose activities deal with or related to the management of
natural resources.
d. Industry
As stipulated by article 74, Law no 402007 on PT, the obligation to carry out CSR program is for Indonesian companies whose activities deal with or related to the
management of natural resources. As the mining firms often associated with the exploitation to the natural resources that may cause a significant environmental damage,
hence we would like to know specifically whether those firms experience more positive market reaction toward mandatory CSR implementation news. Therefore, the fifth
hypothesis of this study is:
H
4:
In response to mandatory CSR implementation law, the stock market will react more positively to mining firms whose activities deal with or related to the management of
natural resources.
4. Research Design and Methodology
