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

Email: gsoepriyanto@binus.edu

**Rudy Suryanto

Accounting Department - Muhammadiyah University Yogyakarta (UMY)

Email:rudysuryanto@yahoo.com

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

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