Corporate Social Responsibility as a Strategic Instrument to Reduce Investor Sentiment

Abstract

Firm performance can be a signal for investors to determine firm value. This study examines whether earnings management and disclosure of corporate social responsibility are hedges to protect firm value when performance declines. The hedging mechanism is used as a new analytical approach. Exogenous variables tested are financial performance, financial risk, and dividend policy on firm value. The population was manufacturing companies listed on the Indonesia Stock Exchange in 2014 -2019. Five hundred and sixteen-year observations were tested to confirm the hedging hypothesis. The analysis method uses path analysis with a variance-based structural equation model. The statistical findings support to acceptance of the three hypotheses. Earnings management and disclosure of corporate social responsibility are tools that successfully cover the decline in firm performance. Earnings management or CSR is a hedging instrument for management when the company performance declines. When performance reduces, its existence eliminates the effect of decreasing firm value. Contrary to predictions, neither variable could offset the increasing pressure on financial risk and dividend policy. Corporate social responsibility disclosure is more effective as a hedging mechanism than earnings management because it directly affects firm value. The results contribute to recognizing the possibility that social responsibility is a matter of signal and opportunistic action. Management seeks to protect the company from declining company performance and other antecedents.

Social Activities and Market Value

“…Management's consideration to disclose CSR is more driven by the interest to protect internal interests. The motive for taxation and hedging against the decline in company value is more dominant than the interest to carry out social activities voluntarily (Kustono, 2021;Park, 2017).…”

“…The higher the company's ability to earn profits, investors obtain the more significant return. High financial performance reflects good company prospects, so there will be a positive response (Kustono, 2021).…”

“…CSR activities are expected to protect the company from situations that reduce the market value (Kustono, 2021). When the company has good news, CSR activities are expected to strengthen the position.…”

“…Social responsibility is a form of responsibility that the company should carry out for the positive and negative impacts arising from its operational activities and may affect the internal and external community within the company. Companies must disclose social responsibility to stakeholders and the market also gives a positive response to the disclosure of CSR activities (Kustono, 2021). CSR activities show a commitment to minimizing or eliminating negative effects and maximizing longterm positive impacts on society.…”