Empirical Results .1 Mandatory CSR Rule and Stock Market Reaction

1642 Table 5 reports the abnormal return and cumulative abnormal return surrounding the event date. As expected, the result shows the mean coefficient for daily AR and 3-day CAR for the news related to the approval of mandatory CSR implementation law is positive. [INSERT TABLE 5 HERE] The parametric test t-test for July 20 event window shows that AR is significant at 15 level and the CAR 3 are significant at 10 level using one tailed test, with t-statistic p- value of 1.25 0.11 for AR and t-statistic p-value of 1.64 0.06 for CAR 3 . Hence, the findings lend support on H 1 on which the market reacts positively for the approval of mandatory CSR implementation bill news. Some explanations on why market reacted positively to the regulation are 1 more CSR programs are conducted and reported by companies in mining and other natural- resource related companies m ight lower companies‘ expose risk Sarre, Doig and Fielder, 2001, 2 some mining companies high-profile industry have undergone some CSR projects voluntarily, so they will have no problems when CSR becomes mandatory 3 the additional activities and reporting required by the law will increase the accuracy of market expectation, lower information asymmetry, and lower market surprise Na‘im Rakhman, 2000. 1643

6.2.2 Determinants of Stock Market Reaction toward Mandatory CSR Rules

Table 6 Panel A and B report the cross sectional regression results of daily Abnormal Return AR and the 3-day CAR CAR 3 on independent variables. The test variables are LOGTA which are measured by the natural logarithm of the total assets of the firms. ROE represents the profitability of the firms measured by profitability; LEV represents riskiness of the firms, measured by the long term debt divided by the total assets; and IND represents for type of industry – whether mining firms or non mining firms, which is a dummy variable that is coded as 1 for mining firm and 0 otherwise. In Panel A table 6, the results of the cross sectional regression with AR as dependent variable indicate that all tested variables move as predicted, with different level of significance. The coefficient of LOGTA is negative with t-statistic p-value of -1.35 0.09 that is significant at 10 level using one tailed test. The coefficient of LEV is positive with t- statistic p-value of 2.08 0.03 and significant at conventional level of 5 level using one tailed test. Meanwhile, the coefficient of IND is positive and significant with t-statistic p- value of 1.74 0.05 and significant at 5 level using one tailed test. Finally, the coefficient of variable ROE is not significant with t-statistic p-value of -0.61 0.273, suggesting that no profitability effect influence the variation in the abnormal return. 1644 Panel B in table 6 shows the cross sectional regression results of CAR 3 on the firm‘s characteristics variables. The results suggest of the CAR 3 regression on all tested variables LOGTA, LEV, and IND move in the same manner as the results of regression, where AR is the dependent variable, without major different in the significance level except for LOGTA. The coefficient of LOGTA variable is still negative with higher t-statistic p-value of -2.31 0.019 and significant at 5 level one-tailed, while the coefficient of variable LEV is still positive with t-statistic p-value of 2.59 0.011 and stays significant at 5 level one tailed. Meanwhile, the coefficient of IND is still positive and significant with t-statistic p-value of 1.99 0.033 and significant at 5 level using one tailed test. Finally, the coefficient of ROE became positive and insignificant with t-statistic of 0.53. Therefore, both for AR and CAR 3 cross sectional model, the results provide support that market used company‘s size, leverage and type of industry as determinant factors in responding to the mandatory requirement of CSR. Concerning the empirical result on size, it is important to note that market reacts more positively in smaller firms, suggesting that market expect smaller firms to carry out CSR activities. In general, previous studies show that bigger firms have more CSR practice and disclosure. This result does not oppose that general views, but somewhat complete them. As market expects that bigger firms have already performed and disclosed CSR programs, such 1645 regulation would not affect much. On the other hand, given the low practice and disclosure of CSR in smaller firms, market view that such regulation will give smaller firms a pressure to conduct and disclose CSR, which is valued by market. The similar explanation is given to why market reacts more positively to higher leverage firms. Previous studies show that higher leverage firms will disclose less CSR information in their annual report, suggesting that higher leverage firms view CSR as an expense that should be minimized. The legal requirement of CSR, therefore, will give pressure to higher leveraged firms to also perform CSR. Hence, this result suggests that market also expect higher leverage firms to perform CSR. Regarding the finding on industry type, which is whether firms are in mining industry or not, is significant as determinant factor. The law explicitly mentions companies in whose deal with natural resources to perform CSR e.g. mining firms, while also mentioning the same obligation to companies whose related to the management of natural resource. The last category is less clear therefore, market reaction to the companies in last category is less strong than in first category. Finally, we find that there is no significant association between market reaction and profitability, suggesting that market view the consequence of the legal requirement of CSR is not associated to company‘s profitability. This is interesting given the fact that mandatory 1646 CSR implementation will incur additional compliance cost. We interpret this result as investor believes that the benefit of CSR practice will outweigh the cost. For example, some studies find that CSR cost may lower claims from community and NGO Mackey, Mackey and Marney, 2007, Bird et al, 2007

7. Conclusion

The purpose of this research is to examine the investor reaction to mandatory CSR implementation law in Indonesia as stipulated in article 74 of Law no. 40, 2007 on PT. Specifically, this study examines whether equity investor in a firm that deals with or is related with the management of natural resources view the news related with the obligation to carry out a social and environmental responsibility program, as a good news or otherwise. Furthermore, the hypothesis of this study expects a positive stock market reaction to the event that leads to approval of mandatory CSR implementation law. Using event study methodology, this study has proven that stock market positively values the approval of mandatory CSR implementation law for firms that deal with or are related to the management of natural resources. It is measured by the positive abnormal return on the day of the announcement and around the day of the related event. It indicates that the equity investors view the mandatory implementation of CSR is a value-enhancing 1647 investment that may result in future cash flow generation. Thereby, value of the shareholders will be maximized. We also examine the contextual factors that are expected to explain the variation of abnormal returns based on firms‘ characteristics and contextual factors, such as the size, the profitability, the leverage level, and the firms‘ engagement in mining industry or not. It is hypothesized that the abnormal return will be more positive for firms that are profitable, have high leverage, and are engaged in mining industry. It is also hypothesized that the abnormal return will be more positive to smaller firms. Using cross sectional regression analysis, the results of this study provide support for the hypothesis. Overall, this study provides evidence of the stock market reaction upon mandatory CSR implementation law in Indonesia. This study lends support on prior literature that CSR is regarded as future investment instead of additional tax burden. Despite the evidence provided in this research, there are several limitations that should be taken into consideration. First, even though we have attempted to isolate the event from other confounding events such as earning and dividend announcement before running the model, it is difficult to isolate the CSR obligation news with many other events in the market, which are beyond scope and not necessarily covered in press news. Second, this study employs 21 sample firms considered to be affected by the CSR mandatory rules in