The CSR Performance and Earning Management Practice on the Market Value of Conventional Banks in Indonesia

The CSR Performance and Earning Management Practice on the Market Value of Conventional Banks in Indonesia

Saarce Elsye Hatane (Petra Christian University, Indonesia), Amadea Nathania Pranoto (Petra Christian University, Indonesia), Josua Tarigan (Petra Christian University, Indonesia), Josephine Alexandra Susilo (Petra Christian University, Indonesia) and Ang Jonathan Christianto (Petra Christian University, Indonesia)
DOI: 10.4018/978-1-7998-4787-8.ch012

Abstract

This study examined the effect of the components of corporate social responsibility (CSR) and earnings management on market value, measured using Tobin's Q. CSR is measured by using KLD Index, while earnings management used discretionary loan loss provision. The GMM-SYS (generalized method of moment system) dynamic panel data method is employed to examine the research framework on conventional banks listed in Indonesia Stock Exchange. Among six components in CSR disclosures, only corporate governance, environmental and product disclosures are favorable for bank's market value. Furthermore, earnings management had a positive impact on market value. Empirical result indicated that CSR functions as a part of bank strategic moves in order to survive the highly dynamical business environment. Since CSR inflicts additional costs for the company, they must perform CSR efficiently while maintaining a strong relationship with shareholders. This study contributes to CSR and financial management literature by finding the nature of CSR effects as future strategic investment.
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Introduction

The banking sector in Indonesia (Hatane et al., 2019) is experiencing a slowdown from decreasing credit quality within the last five years. In 2016, President Joko Widodo also enacted a regulation for banks to reduce their loan rates (Nugroho, 2016). While the government tried to lower the interest rate, banks were facing a series of bad credits. The rise of non-performing loans caused by bad credits has presented a challenge for banks in restoring public trust and building clear, transparent business numbers. On the other hand, banks must also comply with the regulation and reduce lending rates. As a result, banks are indirectly required to implement social, ethical, and responsible approach in their business environment to regain public trust. Corporate social responsibility (CSR) has become a global trend for companies in gaining public trust as well as achieving sustainability. Companies seek to show their concern for the community while promoting organizational participation and position in the market. By applying CSR, firms can benefit from better positioning, even if this necessitates them in spending extra costs. However, having a good image and good firm quality on the market can encourage employees to work productively and achieve higher financial performance (Devie et al. 2018).

CSR in banking is related to its environment, community, and products (Aracil, 2019). The main product of a bank is any facility or service related to cash management, therefore, the important elements for the welfare of banks are finance, customers, and society. A socially responsible bank is accountable to take on responsibility for the impact of its activities on society. Concern for environmental sustainability by banks gave rise to the concept of green banking. The need to adopt green banking practices is considered very important because of its environmental, corporate, and social benefits for the economy (Ibe-Enwo et al. 2019). Secondly, to gain customer and society trust, banks need integrity and transparency to operate (Banking for society, n.d.). Banks are means used by the public to invest their funds. Therefore, banks are very important to have a high level of transparency.

When a company is being transparent by divulging what struggles are being faced, it is doing voluntary disclosure. Yim et al. (2019) contended that by voluntarily disclosing information, the company doing CSR is signaling the public on its quality. To increase customer confidence, companies must reduce information asymmetry. Earnings management is often related to information asymmetry because the concept of earnings management is to manipulate earnings. In the process, profit manipulation can be done to make the company look profitable in that period. However, a socially-responsible corporate has a low incentive to manage earnings (Hong & Andersen, 2011); in other words, a company with poor CSR activities has a higher rate of earnings management. It is hoped that by running CSR well enough, while also having a low level of earnings management, banks have a better reputation and firm market value will increase.

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