Profitability Hypotheses Development 1 Mandatory CSR Rule and Stock Market Reaction

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: 1635 H4: In response to mandatory CSR implementation bill, the stock market will react more positively to higher leverage firms whose activities are to deal with or are related with 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 are related with the management of natural resources. As the mining firms are often associated with the exploitation of the natural resources that may cause a significant environmental damage, we would like to know specifically whether the firms experience more positive market reaction toward the mandatory of CSR implementation news. Therefore, the fifth hypothesis of this study is: H5: In responsing to the mandatory of CSR implementation bill, the stock market will react more positively to mining firms whose activities are related to the management of natural resources.

4. Data

Table 1 shows the sample selection procedure. We started with 35 firms listed in Indonesia Stock Exchange BEI that are categorized as firms whose activities are dealing with or are