Determinants Of Stock Market Reaction Toward Legal Requirement Of Csr In Indonesia

Determinants Of Stock Market Reaction Toward Legal Requirement Of CSR In Indonesia

*Gatot Soepriyanto
Accounting Department Bina Nusantara (BINUS) University

**Rudy Suryanto
Accounting Department – Muhammadiyah University Yogyakarta (UMY)

Prior study on stock market reaction toward mandatory Corporate Social Responsibility (CSR) implementation law in Indonesia (article 74, Law No. 40/2007 on Limited Liability Company) present evidence that the equity investors from firms whose deal with or related to the management of natural resources, reacted positively to the passage of the law. This suggests that investors view mandatory CSR implementation law as “a good news” which in the long run may increase firm values. This study, therefore, aims to investigate the economic determinants that drive positive market reactions, as we found that the magnitude of the reactions were vary among companies taken as sample. We address five hypotheses that investor reaction is explained by: (a) size of firms, (b) profitability of firms, (c) leverage of firms, (d) how long the firm has been established and (e) whether the firms in are engaged in mining or non-mining industry. These hypotheses are investigated through cross-sectional regression analysis on firms that directly affected by the CSR law. We conclude that the stock market reaction toward the law is determined by size, leverage, age of firms and whether firms are engaged in mining industry or not. It also concludes that investors react more (less) positive to small (big) firms and high (low) leverage firms, suggesting that the investor consider the law as “insurance” for company to sustain their operation.


Keywords: CSR Mandatory Law, Stock Market Reaction, Economic Determinants

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., 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.

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Jurnal Simposium Nasional Akuntasi XI (SNA 11)

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