In general, we find that market consider company’s size, leverage, age and industry in determining their response to legal requirement of CSR. Company’s age is
proved to be a significant determinant factor of market reactions, as well as company’s size, leverage and type of industry. We find no significant association of profitability to
the market reactions, suggesting that the consequence of the legal requirement of CSR is not related to company’s profitability.
This study is significant for a number of reasons. First, to seek the pattern of investor’s reaction toward CSR practice and disclosure, since prior studies provide mix of
positive and negative association of CSR disclosure and share price performance. Second, our study will be useful for regulator and policymaker to answer the question
whether mandatory CSR implementation law is beneficial or not beneficial to investors. As such, our result lends a support to the view that mandatory requirement of certain
companies to carry out CSR will give investor “insurance” from any adverse effect of environment and social issues.
The reminder of this paper is organised as follows; section 2 presents a brief review on what prior studies have done, section 3 provides hypothesis development,
section 4 develop research methodology and explain sample data, section 5 discusses the result and section 6 conclusion and limitation of this study.
2. Literature Review
The demand for companies to act in socially and environmentally manner had started to emerge since 1970’s Hines, 1991: 41. The demand now is getting stronger, as
society witnessed the damage caused by big corporations to its environment in term of
pollution, natural resource destruction, dangerous wastes, products safety and limitation of workers’ right Gray et.al, 1995. Many view that the irresponsible manners of the big
corporations above were partly caused by a narrow focus of the companies to maximize its shareholder value, and neglecting the other stakeholders’ interest.
The narrow focus of companies is supported by neo classic economist’s perspective that stated manager’s main objective is to make decisions in maximising
shareholders value, and let the government and other parties to take care of community Friedman, 1970. This argument then challenged by Freeman 2004 with his
“stakeholder theory” which states that management can only maximise shareholders value by maintaining a good relationship with other stakeholders Freeman, 2004. The
effort to balance the role of company to pursue profit and to contribute to its environment is known as Corporate Social Responsibility CSR.
In 1970, AICPA thought that there is a need for companies Social Accounting to incorporate CSR in company annual report Hacston Milne, 1996. However till date,
there is no a generally accepted framework for such accounting. Though, some international bodies had formulated the guidelines for companies to perform and report
CSR, such as UN Compact released by the United Nations, the Global Reporting Initiative released by Sustainability Accounting International SAI but there is no
binding rule for the guidelines. Therefore, CSR programs and reporting remain voluntary. Interestingly more companies now adopt CSR programs and report them in their
annual report Stigson, 2002. Companies willing to invest in CSR and report them in annual report, since they believe CSR programs are inline with their business objectives
Stigson, 2002 and investors valued CSR programs Bird, 2007, Mackey, et. al, 2007.
Indonesia had moved forward by enacted Law no 402007 in which mandated for certain companies to budget and allocate some money in CSR programs. By this law,
Indonesia might be the first country to regulate CSR practice so it’s become mandatory. Wilmhurst 2000 stated that government might intervene to the business process through
regulation, whenever community safeties are in danger. Indonesian public recently had outraged by a number of pollution and major natural destruction done by companies, such
as the case of Inti Indo Rayon in North Sumatera, Newmont in Minahasa and Lapindo Brantas in Sidoarjo. By examining news related to the passage of the mandatory CSR
implementation law, Soepriyanto and Suryanto 2008 find that in general investor response positively to the regulation suggesting that investor views the CSR law as “good
news”. Study on firm characteristic that may affect firms CSR program is categorized
into 2 streams. First stream is evaluating what factors determine the amount and nature of CSR disclosures and second streams is revealing what CSR impact to company
performance, usually in term of profitability or market price Kusumawati, 2007. For the first stream studies, in general, researchers found that there is a low
commitment of Indonesian companies to perform CSR. Henny and Murtanto 2001 found that CSR disclosures in Indonesia were relatively low, only 42.32 of total items
in the CSR disclosure checklist. That finding is far below the level of CSR disclosure in developed countries revealed by Guthrie and Parker 1990. Guthrie and Parker 1990
found level of CSR disclosure in UK 98, US 85 and Australia 56. Although, there is a big gap between CSR practice and disclosure in Indonesia and in developed
countries, there is a consistent finding of factors determined the amount and nature of CSR disclosure in various countries as summarized below.
TABLE 1: Summary of Empirical Evidence on Factors Determined the Amount and
Nature of CSR Disclosure
No Authors, Year Variable
Association Result
1 Belkoui and Karpik 1989
Size Positive
Significant Level of Leverage
Negative Significant
2 Roberts 1992
Profitability Positive
Significant Leverage
Negative Significant
Size Positive
Not Significant Age
Positive Significant
3 Patten 1991
Profitability Positive
Not Significant 4
Gray et al 1995 Profitability
Positive Not Significant
Size Positive
Significant Type of Industry high vs
low profile Positive
Significant Country of origin
- Significant
5 Hacston and Milne 1996
Size Positive
Significant Type of Industry high vs
low profile Positive
Significant Profitability
Positive Not Significant
6 Henny and Murtanto 2001
Type of Industry high vs Low Profile
Positive Significant
7 Marwata 2001
Size Positive
Significant Structure of ownership
- Not Significant
Age of listing Positive
Not Significant 8
Zubaidah and Zulfikar 2005 Size
Positive Significant
Profitability Positive
Significant Auditor Reputation
Positive Significant
9 Sembiring 2005
Size Positive
Significant Type of Industry
Positive Significant
Profitability Positive
Not Significant Leverage
Negative Not Significant
10 Anggraeni 2006
Management equity Positive
Significant Type of Industry
Positive Significant
Size Positive
Not significant Leverage
Positive Not Significant
Profitabilty Positive
Not Significant
From Table 1 above, it shows that there is strong association between size and type of industry with CSR practice and disclosures, and there is a weak association between
profitability, leverage, structure of ownership with CSR practice and disclosures.
In contrast, there are variations in the result of second stream studies of CSR impact to company’s performance as summarized in Table 2 below:
TABLE 2: Summary of Empirical Evidence on CSR Impact to Company’s Performance
No
Authors, Year Measurement
Result
1 Belkoui 1976 in Ahmed et.
al 2000 Stock Price
Significant 2
Shane and Spicer 1983 Abnormal Return
Significant 3
Luthfi 2001 Stock Price
Not Significant 4
Purwanti 2001 Stock Trade Volume
Not Significant 5
Rasmiati 2001 Stock Trade Volume
Not Significant 6
Zuhroh Sukmawati 2003 Stock Trade Volume
Significant
Luthfi 2001, Purwanti 2001 and Rasmiati 2001 findings are in consistent with the other result. Zuhroh Sukmawati 2003 explained in their research that the difference
was due to Luthfi 2001, Purwanti 2001 and Rasmiati 2001 used annual reports of 1998 and 1999 in which Indonesia had financial crisis, therefore, there were potential
biases in their findings.
3. Hypotheses Development
