The impact of mandatory CSR disclosure on firm efficiency in an emerging country
Abstract
The government in emerging economies often moves firstly in issuing regulations to push the firms follow some social commitments. Natural resource-based firms in Indonesia are the first movers to be required for mandatory CSR disclosure. This study explores how the efficiency of those firms was affected under such the regulations. The sample includes Indonesian firms listed on the Indonesia stock exchange in 2009–2019, and the data is analysed by data envelopment analysis and difference-in-differences method with 506 treatment and 2,536 control firm-year observations. The results express the positive impact of mandatory CSR disclosure on firm efficiency. This study also suggests the policy makers to provide clear standards in regulations, and consider expanding the applicable objects. Managers should utilize this regulation as an effective tool to develop and manage the companies’ annual plan, and improve firm performance.
Keyword : mandatory CSR disclosure, firm efficiency, natural resource-based firms, emerging economy, data envelopment analysis, difference-in-differences
How to Cite
Kieu, T.-K., Nguyen, C.-H., & Wu, S.-H. (2022). The impact of mandatory CSR disclosure on firm efficiency in an emerging country. Journal of Business Economics and Management, 23(6), 1334–1350. https://doi.org/10.3846/jbem.2022.18201
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Chen, Y. C., Hung, M., & Wang, Y. (2018). The effect of mandatory CSR disclosure on firm profitability and social externalities: Evidence from China. Journal of Accounting Economics, 65(1), 169–190. https://doi.org/10.1016/j.jacceco.2017.11.009
Coelli, T. J. (1996). A guide to FRONTIER version 4.1: A computer program for stochastic frontier production and cost function estimation (CEPA Working papers No. 7/96).
Cooper, W. W., Seiford, L. M., & Tone, K. (2007). Data envelopment analysis: A comprehensive text with models, applications, references and DEA-solver software (Vol. 2). Springer. https://doi.org/10.1007/978-0-387-45283-8
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Eriandani, R., & Winarno, W. A. (2021). Corporate social activities and adjusted firm performance: An SOE’s context. Indian Journal of Economics Business and Professional Ethics Journal, 20(2), 329–339. https://zenodo.org/record/5409509#.YYC6P55BziA
Escobar-Pérez, B., Lobo-Gallardo, A., & Otero-Terrón, J. I. (2012). A DEA model for measuring efficiency adapted to the hotel sector. Enlightening Tourism. A Pathmaking Journal, 2(1), 44–65.
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Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society: Series A, 120(3), 253–281. https://doi.org/10.2307/2343100
Freeman, R. E. (2010). Strategic management: A stakeholder approach. Cambridge University Press. https://doi.org/10.1017/CBO9781139192675
Friedman, M. (2007). The social responsibility of business is to increase its profits. In W. C. Zimmerli, M. Holzinger, & K. Richter (Eds.), Corporate ethics and corporate governance (pp. 173–178). Springer. https://doi.org/10.1007/978-3-540-70818-6_14
Garg, A., & Gupta, P. K. (2020). Mandatory CSR expenditure and firm performance: Evidence from India. South Asian Journal of Business Studies, 9(2), 235–249. https://doi.org/10.1108/SAJBS-06-2019-0114
Guthrie, J., & Parker, L. D. (1989). Corporate social reporting: A rebuttal of legitimacy theory. Accounting and Business Research, 19(76), 343–352. https://doi.org/10.1080/00014788.1989.9728863
Hossain, M. S., & Saif, A. N. M. (2019). Impact of firm size on financial performance of banking companies in Bangladesh. Journal of Banking & Financial Services, 11(2), 143–160.
Ioannou, I., & Serafeim, G. (2017). The consequences of mandatory corporate sustainability reporting (Harvard Business School research working paper No. 11–100).
Jensen, M. C. (2010). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 22(1), 32–42. https://doi.org/10.1111/j.1745-6622.2010.00259.x
Jones, T. M. (1995). Instrumental stakeholder theory: A synthesis of ethics and economics. Academy of Management Review, 20(2), 404-437. https://doi.org/10.2307/258852
Law of the Republic of Indonesia. (2007). Indonesia Company Act No.40/2007 on Limited Liability Companies, No. 40/2007 C.F.R.
Law of the Republic of Indonesia. (2012). Indonesia Government Regulation No.47/2012 on Corporate Social and Environmental Responsibility, No. 47/2012 C.F.R.
Lin, C. P., Chen, M. H., Wang, J., & Tian, L. (2016). Corporate giving in Taiwan: Agency cost theory vs. value enhancement theory. Asia Pacific Business Review, 23(1), 135–151. https://doi.org/10.1080/13602381.2016.1149376
Liu, L., & Tian, G. G. (2021). Mandatory CSR disclosure, monitoring and investment efficiency: Evidence from China. Accounting & Finance, 61(1), 595–644. https://doi.org/10.1111/acfi.12588
McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 26(1), 117–127. https://doi.org/10.5465/amr.2001.4011987
Mohamed, T., Olfa, B. J., & Faouzi, J. (2014). Corporate social disclosure: Explanatory theories and conceptual framework. International Journal of Academic Research in Management, 3(2), 208–225.
Ngo, T. (2010). Evaluating the efficiency of Vietnamese banking system: An application using Data Envelopment Analysis. SSRN. https://doi.org/10.2139/ssrn.1626009
Ngo, T. (2012a). Measuring the performance of the banking system: Case of Vietnam (1990–2010). Journal of Applied Finance & Banking, 2(2), 289–312.
Ngo, T. (2012b). The performance of Vietnamese banking system under financial liberalization: Measurement using DEA. SSRN. https://doi.org/10.2139/ssrn.2136150
O’Sullivan, A., & Sheffrin, S. M. (2003). Economics: Principles in action. Pearson Prentice Hall.
Owen, D. (2008). Chronicles of wasted time? A personal reflection on the current state of, and future prospects for, social and environmental accounting research. Accounting, Auditing Accountability Journal, 21(2), 240–267. https://doi.org/10.1108/09513570810854428
Pástor, Ľ., & Pietro, V. (2003). Stock valuation and learning about profitability. The Journal of Finance, 58(5), 1749–1789. https://doi.org/10.1111/1540-6261.00587
Phillips, R., Freeman, R. E., & Wicks, A. C. (2003). What stakeholder theory is not. Business Ethics Quarterly, 13(4), 479–502. https://doi.org/10.5840/beq200313434
Rahim, I. (2021). Environmental disclosure and firm efficiency: A study of Pakistani firms. Asian Review of Accounting, 29(3), 269–290. https://doi.org/10.1108/ARA-05-2019-0100
Rinawiyanti, E. D., Huang, X., & As-Saber, S. (2020). Adopting management control systems through CSR strategic integration and investigating its impact on company performance: Evidence from Indonesia. Corporate Governance: The International Journal of Business in Society. https://doi.org/10.1108/CG-04-2020-0150
Rodriguez-Fernandez, M. (2016). Social responsibility and financial performance: The role of good corporate governance. Business Research Quarterly, 19(2), 137–151. https://doi.org/10.1016/j.brq.2015.08.001
Rosser, A., & Edwin, D. (2010). The politics of corporate social responsibility in Indonesia. The Pacific Review, 23(1), 1–22. https://doi.org/10.1080/09512740903398314
Samad, A. (2019). Determinants of Efficiency of the Islamic Banks of Bangladesh during 2008–2012. Journal of Islamic Banking and Finance, 7(1), 1–13. https://doi.org/10.15640/jibf.v7n1a1
Schons, L., & Steinmeier, M. (2016). Walk the talk? How symbolic and substantive CSR actions affect firm performance depending on stakeholder proximity. Corporate Social Responsibility and Environmental Management, 23(6), 358–372. https://doi.org/10.1002/csr.1381
Shaikh, I. (2022). Environmental, social, and governance (ESG) practice and firm performance: An international evidence. Journal of Business Economics and Management, 23(1), 218–237. https://doi.org/10.3846/jbem.2022.16202
Shiu, Y. M., & Yang, S. L. (2017). Does engagement in corporate social responsibility provide strategic insurance‐like effects? Strategic Management Journal, 38(2), 455–470. https://doi.org/10.1002/smj.2494
Stuebs, M., & Sun, L. (2009a). Corporate reputation and technical efficiency: Evidence from the chemical and business services industries. Journal of Applied Business Research, 25(5), 21–30. https://doi.org/10.19030/jabr.v25i5.1003
Stuebs, M., & Sun, L. (2009b). Social responsibility and firm efficiency in the business services industry. SSRN. https://doi.org/10.2139/ssrn.1435032
Su, R., Liu, C., & Teng, W. (2020). The heterogeneous effects of CSR dimensions on financial performance – a new approach for CSR measurement. Journal of Business Economics and Management, 21(4), 987–1009. https://doi.org/10.3846/jbem.2020.12394
Usunier, J. C., Furrer, O., & Furrer-Perrinjaquet, A. (2011). The perceived trade-off between corporate social and economic responsibility. International Journal of Cross Cultural Management, 11(3), 279–302. http://doi.org/10.1177/1470595811413102
Vilanova, M., Lozano, J. M., & Arenas, D. (2009). Exploring the nature of the relationship between CSR and competitiveness. Journal of Business Ethics, 87(1), 57–69. https://doi.org/10.1007/s10551-008-9812-2
Waagstein, P. R. (2011). The mandatory corporate social responsibility in Indonesia: Problems and implications. Journal of Business Ethics, 98(3), 455–466. https://doi.org/10.1007/s10551-010-0587-x
Wang, K. T., & Li, D. (2016). Market reactions to the first-time disclosure of corporate social responsibility reports: Evidence from China. Journal of Business Ethics, 138(4), 661–682. https://doi.org/10.1007/s10551-015-2775-1
Weber, M. (2008). The business case for corporate social responsibility: A company-level measurement approach for CSR. European Management Journal, 26(4), 247–261. https://doi.org/10.1016/j.emj.2008.01.006
Zainal, R. I. (2020). Stakeholders perception on mandated CSR laws in Indonesia. In Proceedings of the 3rd Global Conference on Business, Management, and Entrepreneurship (GCBME 2018). Atlantis Press. https://doi.org/10.2991/aebmr.k.200131.046
Baviera-Puig, A., Baviera, T., Buitrago-Vera, J., & Escribá-Pérez, C. (2020). Internal benchmarking in retailing with DEA and GIS: The case of a loyalty-oriented supermarket chain. Journal of Business Economics and Management, 21(4), 1035–1057. https://doi.org/10.3846/jbem.2020.12393
Bhattacharyya, A., & Rahman, M. L. (2019). Mandatory CSR expenditure and firm performance. Journal of Contemporary Accounting Economics, 15(3), 100163. https://doi.org/10.1016/j.jcae.2019.100163
Brammer, S., & Millington, A. (2008). Does it pay to be different? An analysis of the relationship between corporate social and financial performance. Strategic Management Journal, 29(12), 1325–1343. https://doi.org/10.1002/smj.714
Carson, T. (1993). Friedman’s theory of corporate social responsibility. Business and Professional Ethics Journal, 12(1), 3–32. https://doi.org/10.5840/bpej199312118
Charnes, A., Cooper, W. W., & Rhodes, E. (1978). Measuring the efficiency of decision making units. European Journal of Operational Research, 2(6), 429–444. https://doi.org/10.1016/0377-2217(78)90138-8
Chen, Y. C., Hung, M., & Wang, Y. (2018). The effect of mandatory CSR disclosure on firm profitability and social externalities: Evidence from China. Journal of Accounting Economics, 65(1), 169–190. https://doi.org/10.1016/j.jacceco.2017.11.009
Coelli, T. J. (1996). A guide to FRONTIER version 4.1: A computer program for stochastic frontier production and cost function estimation (CEPA Working papers No. 7/96).
Cooper, W. W., Seiford, L. M., & Tone, K. (2007). Data envelopment analysis: A comprehensive text with models, applications, references and DEA-solver software (Vol. 2). Springer. https://doi.org/10.1007/978-0-387-45283-8
Eccles, R. G., Ioannou, I., & Serafeim, G. (2014). The impact of corporate sustainability on organizational processes and performance. Management Science, 60(11), 2835–2857. https://doi.org/10.1287/mnsc.2014.1984
Eriandani, R., & Winarno, W. A. (2021). Corporate social activities and adjusted firm performance: An SOE’s context. Indian Journal of Economics Business and Professional Ethics Journal, 20(2), 329–339. https://zenodo.org/record/5409509#.YYC6P55BziA
Escobar-Pérez, B., Lobo-Gallardo, A., & Otero-Terrón, J. I. (2012). A DEA model for measuring efficiency adapted to the hotel sector. Enlightening Tourism. A Pathmaking Journal, 2(1), 44–65.
European Commission. (2011). Communication from the Commision to the European Parliament, the Council, the European Ecnomic and Social Committee and the Committee of the Regions – A renewed EU strategy 2011-14 for Corporate Social Responsbility. Brussels, Belgium. https://www.europarl.europa.eu/meetdocs/2009_2014/documents/com/com_com(2011)0681_/com_com(2011)0681_en.pdf
Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society: Series A, 120(3), 253–281. https://doi.org/10.2307/2343100
Freeman, R. E. (2010). Strategic management: A stakeholder approach. Cambridge University Press. https://doi.org/10.1017/CBO9781139192675
Friedman, M. (2007). The social responsibility of business is to increase its profits. In W. C. Zimmerli, M. Holzinger, & K. Richter (Eds.), Corporate ethics and corporate governance (pp. 173–178). Springer. https://doi.org/10.1007/978-3-540-70818-6_14
Garg, A., & Gupta, P. K. (2020). Mandatory CSR expenditure and firm performance: Evidence from India. South Asian Journal of Business Studies, 9(2), 235–249. https://doi.org/10.1108/SAJBS-06-2019-0114
Guthrie, J., & Parker, L. D. (1989). Corporate social reporting: A rebuttal of legitimacy theory. Accounting and Business Research, 19(76), 343–352. https://doi.org/10.1080/00014788.1989.9728863
Hossain, M. S., & Saif, A. N. M. (2019). Impact of firm size on financial performance of banking companies in Bangladesh. Journal of Banking & Financial Services, 11(2), 143–160.
Ioannou, I., & Serafeim, G. (2017). The consequences of mandatory corporate sustainability reporting (Harvard Business School research working paper No. 11–100).
Jensen, M. C. (2010). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 22(1), 32–42. https://doi.org/10.1111/j.1745-6622.2010.00259.x
Jones, T. M. (1995). Instrumental stakeholder theory: A synthesis of ethics and economics. Academy of Management Review, 20(2), 404-437. https://doi.org/10.2307/258852
Law of the Republic of Indonesia. (2007). Indonesia Company Act No.40/2007 on Limited Liability Companies, No. 40/2007 C.F.R.
Law of the Republic of Indonesia. (2012). Indonesia Government Regulation No.47/2012 on Corporate Social and Environmental Responsibility, No. 47/2012 C.F.R.
Lin, C. P., Chen, M. H., Wang, J., & Tian, L. (2016). Corporate giving in Taiwan: Agency cost theory vs. value enhancement theory. Asia Pacific Business Review, 23(1), 135–151. https://doi.org/10.1080/13602381.2016.1149376
Liu, L., & Tian, G. G. (2021). Mandatory CSR disclosure, monitoring and investment efficiency: Evidence from China. Accounting & Finance, 61(1), 595–644. https://doi.org/10.1111/acfi.12588
McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 26(1), 117–127. https://doi.org/10.5465/amr.2001.4011987
Mohamed, T., Olfa, B. J., & Faouzi, J. (2014). Corporate social disclosure: Explanatory theories and conceptual framework. International Journal of Academic Research in Management, 3(2), 208–225.
Ngo, T. (2010). Evaluating the efficiency of Vietnamese banking system: An application using Data Envelopment Analysis. SSRN. https://doi.org/10.2139/ssrn.1626009
Ngo, T. (2012a). Measuring the performance of the banking system: Case of Vietnam (1990–2010). Journal of Applied Finance & Banking, 2(2), 289–312.
Ngo, T. (2012b). The performance of Vietnamese banking system under financial liberalization: Measurement using DEA. SSRN. https://doi.org/10.2139/ssrn.2136150
O’Sullivan, A., & Sheffrin, S. M. (2003). Economics: Principles in action. Pearson Prentice Hall.
Owen, D. (2008). Chronicles of wasted time? A personal reflection on the current state of, and future prospects for, social and environmental accounting research. Accounting, Auditing Accountability Journal, 21(2), 240–267. https://doi.org/10.1108/09513570810854428
Pástor, Ľ., & Pietro, V. (2003). Stock valuation and learning about profitability. The Journal of Finance, 58(5), 1749–1789. https://doi.org/10.1111/1540-6261.00587
Phillips, R., Freeman, R. E., & Wicks, A. C. (2003). What stakeholder theory is not. Business Ethics Quarterly, 13(4), 479–502. https://doi.org/10.5840/beq200313434
Rahim, I. (2021). Environmental disclosure and firm efficiency: A study of Pakistani firms. Asian Review of Accounting, 29(3), 269–290. https://doi.org/10.1108/ARA-05-2019-0100
Rinawiyanti, E. D., Huang, X., & As-Saber, S. (2020). Adopting management control systems through CSR strategic integration and investigating its impact on company performance: Evidence from Indonesia. Corporate Governance: The International Journal of Business in Society. https://doi.org/10.1108/CG-04-2020-0150
Rodriguez-Fernandez, M. (2016). Social responsibility and financial performance: The role of good corporate governance. Business Research Quarterly, 19(2), 137–151. https://doi.org/10.1016/j.brq.2015.08.001
Rosser, A., & Edwin, D. (2010). The politics of corporate social responsibility in Indonesia. The Pacific Review, 23(1), 1–22. https://doi.org/10.1080/09512740903398314
Samad, A. (2019). Determinants of Efficiency of the Islamic Banks of Bangladesh during 2008–2012. Journal of Islamic Banking and Finance, 7(1), 1–13. https://doi.org/10.15640/jibf.v7n1a1
Schons, L., & Steinmeier, M. (2016). Walk the talk? How symbolic and substantive CSR actions affect firm performance depending on stakeholder proximity. Corporate Social Responsibility and Environmental Management, 23(6), 358–372. https://doi.org/10.1002/csr.1381
Shaikh, I. (2022). Environmental, social, and governance (ESG) practice and firm performance: An international evidence. Journal of Business Economics and Management, 23(1), 218–237. https://doi.org/10.3846/jbem.2022.16202
Shiu, Y. M., & Yang, S. L. (2017). Does engagement in corporate social responsibility provide strategic insurance‐like effects? Strategic Management Journal, 38(2), 455–470. https://doi.org/10.1002/smj.2494
Stuebs, M., & Sun, L. (2009a). Corporate reputation and technical efficiency: Evidence from the chemical and business services industries. Journal of Applied Business Research, 25(5), 21–30. https://doi.org/10.19030/jabr.v25i5.1003
Stuebs, M., & Sun, L. (2009b). Social responsibility and firm efficiency in the business services industry. SSRN. https://doi.org/10.2139/ssrn.1435032
Su, R., Liu, C., & Teng, W. (2020). The heterogeneous effects of CSR dimensions on financial performance – a new approach for CSR measurement. Journal of Business Economics and Management, 21(4), 987–1009. https://doi.org/10.3846/jbem.2020.12394
Usunier, J. C., Furrer, O., & Furrer-Perrinjaquet, A. (2011). The perceived trade-off between corporate social and economic responsibility. International Journal of Cross Cultural Management, 11(3), 279–302. http://doi.org/10.1177/1470595811413102
Vilanova, M., Lozano, J. M., & Arenas, D. (2009). Exploring the nature of the relationship between CSR and competitiveness. Journal of Business Ethics, 87(1), 57–69. https://doi.org/10.1007/s10551-008-9812-2
Waagstein, P. R. (2011). The mandatory corporate social responsibility in Indonesia: Problems and implications. Journal of Business Ethics, 98(3), 455–466. https://doi.org/10.1007/s10551-010-0587-x
Wang, K. T., & Li, D. (2016). Market reactions to the first-time disclosure of corporate social responsibility reports: Evidence from China. Journal of Business Ethics, 138(4), 661–682. https://doi.org/10.1007/s10551-015-2775-1
Weber, M. (2008). The business case for corporate social responsibility: A company-level measurement approach for CSR. European Management Journal, 26(4), 247–261. https://doi.org/10.1016/j.emj.2008.01.006
Zainal, R. I. (2020). Stakeholders perception on mandated CSR laws in Indonesia. In Proceedings of the 3rd Global Conference on Business, Management, and Entrepreneurship (GCBME 2018). Atlantis Press. https://doi.org/10.2991/aebmr.k.200131.046