1. Introduction
After a heated debate on whether mandatory corporate social responsibility CSR implementation would benefit or harm the company, the House Representative DPR
finally approved the bill on July 20, 2007 – which require a company whose activities deal with or related to the management of natural resources to carry out a CSR program.
This mandatory rule is enacted under article 74 of Law no. 1, 2007 on Limited Liability Company PT. Based on such research setting, Soepriyanto and Suryanto 2008
examine stock price reactions to the passage of the bill – specifically to the share price of firms that directly affected by the law i.e. seven sub industries whose activities deal with
or related to the management of natural resources and find some evidence that on average, equity investors react positively to the approval of mandatory CSR
implementation law. Their result consistent with prior studies which suggested that CSR will help investor to minimize exposed risk of the companies Heugens, 2007, Chih. et.al,
2007, Sarre, 2001 and maintain companies’ reputation Rowe, 2007. In summary, their result supports the view that CSR program will contribute positively to the firm value.
Their study, however, posit another interesting question – what factors determined the positive market reaction? Further examination into the magnitude of abnormal return
and three-day cumulative abnormal returns around the event date of their sample companies also demonstrate a wide variation. We speculate that market did not take for
granted the information related to CSR, but they will relate the information to the economic characteristic of each company such as size, profitability and leverage. This
research, therefore, aims to investigate the economic determinants that drive the market reactions toward mandatory CSR implementation law
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
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