Minggu, 10 Juni 2012

TUGAS AKUNTANSI INTERNASIONAL (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)

ABSTRACT

            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. 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.

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 40/2007 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).

  3. Hypotheses Development

            Prior study (Soepriyanto & Suryanto, 2008) finds that market react positively to legal requirement stipulated in article 74, Law 40/2007 which mandates Indonesian companies whose activities deal with or related to the management of natural resources to carry out CSR programs. The market respond positively to the regulation as illustrated by abnormal return and three-day cumulative abnormal returns that significantly different from zero, on the event date related to the passage of the regulation.
            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 might lowered companies’ expose risk (Sarre, et. al 2001), (2) the cost of that programs is below the expected benefit for example the addition CSR cost will lower claims from community and NGO (Mackey, et al. 2007, Bird et al, 2007) , (3) some mining companies (high-profile industry) have undergone some CSR projects voluntarily, so they will have no problems when CSR becomes mandatory (4) 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).
 
4. Research Design and Methodology

4.1 Empirical Model

4.1.1 The Cross Sectional Regression Model

            As the objective of this study is to investigate the determinant of market reaction upon the obligation of CSR implementation as prescribed by article 74 of Law no. 40, 2007, a cross sectional analysis is employed.  The cross sectional regression model was used to examine the relationship between stock price movements represented by abnormal return or cumulative abnormal returns (CAR) from the event window and the range of variables outlined in the hypothesis development section that were predicted to influence price reaction.

4.1.2 The Standard Market Model

            In order to examine the hypothesis, we also used the standard market model to calculate AR and CAR as our dependent variable in Equation (1). This model allows us to measure the effect of a particular event on the share return of the firms. To estimate the abnormal return for the day related to the approval of mandatory CSR implementation law, a standard market model is used (see Equation 2).

5. Empirical Results

5.1 Descriptive Statistics
            Table 6 reports descriptive statistics for abnormal returns and selected firm characteristics for the 21 sample firms. Panel A and B show the descriptive statistics for daily abnormal return (AR) and 3-day cumulative abnormal returns (CAR) surrounding the passage of CSR mandatory implementation law. Meanwhile, Panel C describes the descriptive statistics for independent variables.
5.2 Correlation Matrix
            Table 7 reports the Pearson correlation matrix for independent variables used in the cross sectional model. It shows that there is a positive correlation between variable LOGTA and ROE. This indicates that larger firms in the sample reports higher ROE than smaller firms suggesting that larger firms are more profitable than smaller firms. Meanwhile, the correlation between variable ROE and LEV is negative. This suggests that more profitable firms have less leverage and thus less risky firms.
5.3 Empirical Results
            Table 8 Panel A and Panel B reports the cross sectional regression results of daily Abnormal Return (AR) and the 3-day CAR (CAR3) on independent variables. The test variables are LOGTA which is 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; AGE represents age of the firm measured by current year (2007) deducted by firm’s date of establishment and IND as representation 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.
5.4. Diagnostic Checks
            Several statistical problems may impair the inferences drawn from the results reported in Tables 8. Therefore, diagnostic tests are performed to determine if reported results are affected by the statistical problems.

 6. Conclusion and Limitation

            The purpose of this research was to examine the determinant and contextual factor of market reaction to the news related to the passage of mandatory CSR implementation law as stipulated in article 74, Law no. 40/2007 on PT. This study extends Soepriyanto and Suryanto (2008) study who find a positive stock market reaction to the approval of mandatory CSR law. The variation of abnormal return is expected to be differed based on a several firm’s characteristics and contextual factor, such as the size, the profitability, the leverage level, age of the firms and whether firms engaged in mining industry or not. It is hypothesised that the abnormal return will be more positive for firms that profitable, high leverage, older firms and engaged in mining industry. It is also hypothesised 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.
            The results of the cross sectional regression, then, shows that there is strong association between market reactions toward the legal requirement of CSR and company’s age. Market react more positively to older companies, as market perceived that the older companies have better experience in conducting CSR program.
            We also document that market used company’s size, leverage and type of industry as determinant factors in responding to the legal requirement of CSR. Interestingly, market reacts more positively in smaller firms, suggesting that market expect smaller firms to perform CSR. 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 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 minimised. 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.
            We also find that type of industry, 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.
            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.

Reference

Ahmed, Riai, Belkoui (2000) Teori Akuntansi. Buku Satu. Edisi Pertama. Salemba Empat. Jakarta
Anggraeni, F. R. R. (2006). Pengungkapan Informasi Sosial dan Faktor-Faktor yang Mempengaruhi Pengungkapan Informasi Sosial dalam Laporan Keuangan Tahunan (Studi Empiris pada Perusahaan-perusahaan yang terdaftar di BEI). Simposium Nasional Akuntansi 9, Padang.
Patten, D. M. (1991). "Exposure, Legitimacy and Social Disclosure." JOurnal of Public Policy 10: 297-308.

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