Leverage Hypotheses Development 1 Mandatory CSR Rule and Stock Market Reaction

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 1636 related with the management of natural resources. Then we filtered out 1 firm due to its inactive share price movement, 9 firms for their insufficient share price data and 4 firms for their confounding events. It limits our sample into 21 firms. Our share price data is obtained from Indonesia Securities Market Directory ISMD. [INSERT TABLE 1 HERE] Table 2 illustrates that the sample used in this study is distributed across 4 industries and 7 sub industries based on IDX industry classification. The sample constitutes 10 firms from Mining industry 47, 8 firms from Basic Material and Chemical industry 38, 1 firm from Infrastructure, Utility and Transportation industry 5 and 2 firms from Agriculture industry 10. [INSERT TABLE 2 HERE]

5. Research Design and Methodology

5.1 Empirical Model

5.1.1 The Standard Market Model As the objective of this study is to investigate the market reaction upon the obligation of CSR implementation prescribed by article 74 of Law no. 40, 2007, the Event Study