As investors nowadays are concerned against social issues

As investors nowadays are concerned against social issues, Corporate Social Responsibility (CSR) has been implemented as one of corporate business activities. Nevertheless, previous studies have shown divergent result regarding its benefits. By the fact that Indonesia is the first nation in the world that makes CSR mandatory and regulated in law, this debate is getting more interesting to be investigated. This study measures CSR by analysing social media utilization, specifically Facebook. In total, 9,283 Facebook posts from 25 ethical stocks listed in SRI-KEHATI Index and 6 sin stocks categorized as “Triumvirate of Sin” (alcohol, tobacco, and gaming industries) are analysed. Event study is utilized to examine abnormal stock return and multiple regression is conducted to check the connection between CSR, corporate image, and financial performance. From event study, the outcome shows that CSR publication on Facebook has positive impacts towards firm’s financial performance, particularly among sin industries. While from the multiple regression, CSR has positive impacts on corporate image for both industries. However, CSR has insignificant impact towards ethical industries’ financial performance, and negatively affecting sin industries’. Lastly, corporate image has positive impacts on ethical industries’ financial performance, but there is no statistically significant effect taking place against sin industries.

Keywords: sin stocks; Corporate Social Responsibility (CSR); corporate image; financial performance
INTRODUCTION
Investors have several considerations in choosing which stock they will invest. One of the criteria they analyze is the social standards won inside the public. Thus, there are two kinds of stock; sin stocks and ethical stocks. There are three principal industries which are categorized as sin stocks, known as “Triumvirate of Sin”. They are alcohol, tobacco, and gaming industries (Hong & Kacpercyzk, 2009). These businesses are seen as sinful because they are additive and lead to undesirable social consequences of extreme fulfillment. In Indonesia, we have a tendency to pick ethical stocks to invest by doing positive screening. Positive screening is another idea of screening to invest only in “positive” stocks and avoid controversial stocks. Indonesia has connected this idea by constructing an index which is called SRI-KEHATI Index. SRI-KEHATI Index provides information about companies that implement sustainable financial, social, and environmental governance in their business activities.

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Nowadays, investors start paying more attention in social issues. As a result, both sin and ethical companies execute Corporate Social Responsibility (CSR) activities in their business practices. Previous studies define CSR as commitment within organization to improve social prosperity by controlling social, environmental, and economic aspect thoroughly as well as improving stakeholder relationship (Ihlen, Bartlett, & May, 2011; Zhang, Morse, Kambhamptati, & Li, 2014). By implementing CSR activities, companies hope they will get good corporate image as well as trustworthiness in return.

The contribution of this research is by looking at the benefit of implementing CSR in both ethical and sin industries in Indonesia. The author focuses on analyzing Facebook usage as an instrument to publicize CSR as it is the most visited social media platform in Indonesia (APJII, 2016). Besides, the author also centers in analyzing companies in Indonesia as it is the first country on the planet that makes CSR compulsory and managed in the Law. In view of previous studies, the connection between corporate image and customer loyalty is positive. Good corporate image will result in expanding customer faithfulness through repurchase intention and recommendation behavior (Chaudhuri & Holbrook, 2001; Dick & Basu, 1994). However, the connection amongst CSR and financial performance is still inconclusive. There are positive, negative, and neutral impact (McWilliams & Siegel, 2000).

THEORETICAL FOUNDATIONS
Corporate Social Responsibility (CSR) is commitment of the company to improve the wealth of society by running ethical business activities and sharing several resources with the community around business practices (Kotler & Lee, 2005). There are lots of advantages that will be gained by company who conducts CSR activities, such as reputation improvement, develops customer loyalty, a source of product differentiation, attracts and maintains competent worker, and enhances community support towards the firm (Booth & Matic, 2011; Fombrun, Gardberg, & Sever, 2000; Patino, Pitta, & Quinones, 2012; Yan, 2011). Elkington (1997) argues that to achieve sustainable business, company has to pay attention in both shareholders and stakeholders interest. Therefore, he introduces a CSR concept to maintain company’s sustainability that is called Triple Bottom Line. Triple Bottom Line consists of 3Ps; profit, people, and planet. It is a tool to measure financial, social, and environmental performance of a company within a certain time (The Economist, 2009).

One of the advantages of conducting CSR activities is improving corporate image. Corporate image is firm’s attractiveness as it differs one brand from another (Alvesson & Berg, 1992). Several studies have proved that the most crucial factors in developing customer loyalty are corporate image as well as corporate reputation. They have such strength that will stick on consumer’s mind every time they hear the name of the organization (Bravo, Montaner, ; Pina, 2009; Hatch, Schultz, ; Williamson, 2003; Nguyen, 2006). According to Perez and Bosque (2015), CSR has a positive impact in building emotions and it is indeed a key strategic tool to boost customer satisfaction and loyalty. Therefore, the relationship between CSR, customer satisfaction, corporate image, and corporate loyalty is positive. However, diverge results are found within sin industries. The effort to improve firm’s reputation among controversial industries is meaningless (Barraclough & Morrow, 2008; Hing, 2001; Yoon, Gurhan-Canli, & Schwarz, 2006). In contrast, Cai, Jo, and Pan (2012) believe that the value of controversial industries will increase if they implement CSR activities.

The relationship between CSR and financial performance is also inconclusive. Some studies prove a positive relation (Orlitzky, Schmidt, & Rynes, 2003) but there are also negative and neutral impact (McWilliams & Siegel, 2000). Cai et al. (2012) explain that this inconsistency is a result of CSR performance measurement, sample coverage, and research design inequality. Meanwhile, research conducted by Nilsson (2009) about the relationship between CSR and firm profitability also shows contradictive result. Some studies believe there is positive relationship between CSR and firm profitability. Another studies argue neutral impact exists. Waddock & Graves (1997) find CSR has negative impact towards firm profitability as it leads to additional costs that will reduce profit as well as shareholder value.

This research objective is to examine the impact of CSR implementation by sin stocks who tend to damage environment, society, and governance. Hong & Kacpercyzk (2009) categorize sin stocks in three fundamental enterprises, which is called “Triumvirate of Sin”. They are alcohol, tobacco, and gaming industries. In Indonesia, there are just two wicked industries which are publicly traded; alcohol and tobacco. Sin stocks have several attributes which separate itself with ethical stocks. They have lower institutional ownership ratio, underpriced yet outperformed, high level of subjective risk which leads to higher expected return, positive monopolistic return, and higher leverage as a result of undervalued equity from limited risk sharing (Fabozzi, Ma, & Oliphant, 2008; Hong & Kacpercyzk, 2009; Merton, 1987; Statman, Fisher, & Anginer, 2008).

METHODOLOGY

Data Collection
This study combines primary and secondary data to achieve research objectives. Dependent variables in this research are firm’s financial performance and corporate image. While for the independent variables, the author measures CSR implementation and corporate image as well. Firm’s financial performance is calculated from its stock return through Yahoo! Finance historical price and analyzed by conducting event study. CSR implementation and corporate image data is obtained from company’s publication in their Facebook Page. CSR implementation is categorized into Environmental, Social, and Governance (ESG) referring to Viehs, Clark, and Feiner (2015), whilst corporate image is analyzed from the total likes, comments, and shares obtained per post. Last, control variables data are acquired from firm’s annual report as well as Indonesia Stock Exchange (IDX) website. They are firm size (SIZE), age (AGE), previous financial performance (PFP), type of industry (IND), leverage (LEV), ownership (OWN), and R&D (R&D). SIZE is the natural logarithm of total asset, AGE is the natural logarithm of firm’s age, PFP is firm’s ROE, IND is dummy variables categorized into 9 industry sectors based on IDX, LEV is debt ratio, OWN is dummy variables for SOEs or POEs, and R&D is R&D ratio which is calculated from R&D expenses divided by total sales. The population of this research are all of ethical stocks listed by SRI-KEHATI Index and all of sin stocks categorized as “Triumvirate of Sin” in Indonesia in year 2017. On the whole, the author analyzes 9,283 Facebook posts from 25 ethical stocks and 6 sin stocks in Indonesia.

Research Model
To achieve the purpose of the study, the author uses multiple regression to determine the relationship between Corporate Social Responsibility (CSRImp), Corporate Image (CI), and Financial Performance (CAR). At first, Three Stage Least Squares (3SLS) is preferred as it is a system method applied to all research model equations at the same time and assess all of the parameters simultaneously (Koutsoyiannis, 2001). However, due to data limitations, the author uses multiple regression instead.

• CSR and CI
To determine the impact of CSR towards CI, the equation model refers to Cui, Jo, and Na (2012) and Farag, Meng, and Mallin (2015) is implemented and written as follows:

Where control variables included are SIZE, AGE, PFP, and IND (Fombrun & Shanley, 1990; Maurya, Mishra, Anand, & Kumar, 2015; Roberts & Dowling, 2002; Tsai & Yang, 2010).
This research model is applied to answer hypothesis 1 and 2, where the author expects there will be positive impact for companies who implement CSR in their business practices against their CI, for both ethical and sin industries. This is because CSR has the ability to build customer satisfaction and loyalty (Perez & Bosque, 2015), and it is vastly valued by public particularly in developing countries (Carroll, 2004).

• CSR and FP
To determine the impact of CSR towards FP, the equation model which also refers to Cui et al. (2012) and Farag et al. (2015) is as follows:

Where control variables included are SIZE, LEV, OWN, R&D, and IND (Margolis, Elfenbein, & Walsh, 2009; Mishra & Suar, 2010; Tsoutsoura, 2004; Zhang, 2016).
This research model is applied to answer hypothesis 3 and 4, where the author argues that positive impact will happen between CSR and FP in Indonesian ethical industries. However, opposite argument is expected for sin industries in Indonesia. According to Carroll (2004), companies that conduct their businesses ethically will have a big positive impact, specifically in developing countries. However, investors still refuse investing in sin industries that execute unethical business practices, as has been found by Hong and Kacpercyzk (2009).

• CI and FP
To determine the impact of CI towards FP, the equation model which also refers to Cui et al. (2012) and Farag et al. (2015) is as follows:

Where control variables included are SIZE, LEV, OWN, R&D, and IND (Margolis et al., 2009; Mishra & Suar, 2010; Tsoutsoura, 2004; Zhang, 2016).
This research model is applied to answer hypothesis 5 and 6, where the author expects positive impact will occur between CI and FP, both in sin and ethical companies in Indonesia. By having good corporate image, customer loyalty through repurchase and recommendation behavior will also increase (Chaudhuri & Holbrook, 2001; Dick & Basu, 1994). Moreover, company will also gain support from stakeholders and shareholders that will generate continuation of financial performance.

FINDINGS AND ARGUMENT

Event Study Analysis
Figure 1 shows the average abnormal return (AAR) as an impact of CSR announcement on Facebook. Both ethical and sin stocks obtain positive reaction from the market, although they differ in time. In ethical stocks, positive AAR can be seen one day after the announcement date (d+1) at 0.2431% with 10% significance level. This return is also the highest among the event window. Positive AAR is also visible five days after the announcement date (d+5) at 0.0218%, insignificantly. On the other hand, positive AAR in sin stocks has already existed exactly on the announcement date (d+0) at 0.6495%. This return stands on the second highest among the event window, after d+3 which obtains positive AAR at 0.7656%. Both d+0 and d+3 AAR are statistically significant at 5%. On the other hand, positive cumulative average abnormal return (CAAR) among ethical industries is visible one day after announcement date (d+1) and one day after (d+2) at 0.1519% and 0.1390%, insignificantly. Whereas in sin industries, positive CAAR only observed three days after announcement date (d+3) at 0.0282% insignificantly. CAAR is illustrated in Figure 2. Based on Figure 1 and Figure 2, sin stocks are proven to be more volatile compared to the ethical ones, and sin stocks’ investors are more concerned about CSR implementation in business practices.

Fig. 1. (a) Average Abnormal Return (AAR) in Ethical and Sin Stocks; (b) Cumulative Average Abnormal Return (CAAR) in Ethical and Sin Stocks

Ethical industries’ performance which tends to advance one day after announcement date (d+1) is align with the US (Sabbaghi & Xu, 2013) and European market (Cellier & Chollet, 2011). This proves that Indonesians reaction is similar with global ethical investors. On the other hand, sin industries’ performance in the US increases one day after announcement date (d+1). While for Indonesia, market reacts significantly positive right on the announcement date (d+0). This phenomenon proves that Indonesian investors are more concerned about CSR run by the controversial industries compared to US investors.

Multiple Regression Analysis
• Regression Results in Ethical Industries
a. Corporate Social Responsibility (CSR) and Corporate Image
CSR implementation in ethical industries is proven to develop corporate image significantly. Based on Table 1 at model 11 and 13, every 10% enhancement of CSR publication on Facebook will increase total engagement by 7 to 14 points. These findings show that Indonesian people are concerned against CSR executed by ethical industries. Moreover, it is in line with Etter (2013) that find CSR as an important factor affecting corporate image and reputation as well as relationship with stakeholders. Hence, the first hypothesis (H1) of this research is accepted. For control variable used, firm’s age has significant positive impacts towards corporate image, aligned with Sageder, Mitter, & Feldbauer-Durstmuller (2018) who find better stakeholders engagement and firm’s reputation possessed by older companies.

Table 1. Regression Result of CSR and Corporate Image in Ethical Industries
Model 11 12 13
Dependent Variable CI
Independent Variable CSRImp 0.662* 1.420***
(0.065) (0.001)
Control Variables SIZE 0.280 0.304
(0.371) (0.316)
AGE 0.446** 0.536***
(0.046) (0.010)
PFP 0.068 -0.365
(0.922) (0.592)
IND Yes Yes
Constant 97.455*** -820.432*** -625.580***
(0.000) (0.000) (0.000)
Output N 260 260 260
P-value of F-stat 0.065* 0.000*** 0.000***
r2 0.014 0.083 0.109

b. Corporate Social Responsibility (CSR) and Financial Performance
While CSR has significant positive impacts towards corporate image among ethical industries, Table 2 shows that its impact towards firm’s financial performance is ended up being insignificant. This outcome indicates that Indonesian investors generally do not make CSR as one of consideration when investing in ethical stocks. This finding is conflicting with Orlitzky et al. (2013) that proves positive relationship between CSR and financial performance. One possible explanation for this finding is that investors have already expected ethical industries to execute CSR (Boardman & Vining, 1989). Hence, there is not enough evidence to reject the third hypothesis (H3) of this research. For control variable used, firm’s leverage is found to have negative impacts towards stock return, showing that Indonesian investors generally abstain from investing in high leverage stocks due to greater risk of inability to fulfil debt payments (Gitman ; Zutter, 2015).

Table 2. Regression Result of CSR and Financial Performance in Ethical Industries
Model 21 22 23
Dependent Variable CAR
Independent Variable CSRImp 0.235 0.162
(0.573) (0.803)
Control Variables SIZE 0.182 0.202
(0.650) (0.631)
LEV -0.663** -0.663**
(0.023) (0.023)
OWN Yes Yes
R;D 1.011 1.121
(0.599) (0.574)
IND Yes Yes
Constant 126.914*** 1396.699*** 1478.347***
(0.000) (0.000) (0.000)
Output N 260 260 260
P-value of F-stat 0.573 0.000*** 0.000***
r2 0.001 0.112 0.112

c. Corporate Image and Financial Performance
Good corporate image possessed by ethical industries in Indonesia is found to have positive impacts towards firm’s financial performance, as can be seen in Table 3. Statistically significant at 1% level, every increment of Facebook engagement will enhance stock return by 0.19 to 0.24 points. These findings denote that although Indonesian investors do not overreact towards ethical industries’ CSR, they decided to purchase the stocks due to high public response. This result is in line with Mizik (2014) that finds brand value has positive impacts on firm’s financial performance, both short and long term. Hence, the fifth hypothesis (H5) of this research is accepted. For control variables used, firm’s leverage also has significant negative impacts towards financial performance as stated in the previous section. This finding shows that Indonesian investors generally avoid investing in high leveraged stocks because of having greater bankruptcy risks (Gitman ; Zutter, 2015).

Table 3. Regression Result of Corporate Image and Financial Performance in Ethical Industries
Model 31 32 33
Dependent Variable CAR
Independent Variable CI 0.240*** 0.190***
(0.001) (0.010)
Control Variables SIZE 0.182 0.144
(0.650) (0.721)
LEV -0.663** -0.558*
(0.023) (0.056)
OWN Yes Yes
R;D 1.879 0.350
(0.311) (0.862)
IND Yes Yes
Constant 156.245*** 1450.113*** 1263.554***
(0.000) (0.000) (0.000)
Output N 260 260 260
P-value of F-stat 0.001*** 0.000*** 0.000***
r2 0.041 0.112 0.133

• Regression Results in Sin Industries
a. Corporate Social Responsibility (CSR) and Corporate Image
Sin industries who implement CSR will gain positive impacts against their corporate image, as stated in Table 4. From model 13, sin industries will gain 7 points more in total likes, shares, and comments acquired for every 10% advancement of CSR publication in Facebook. Significant at 1% level, this finding shows that Indonesian sin industries’ corporate image are refined after running CSR, and as an evidence that Indonesian people care enough about CSR in sin industries. This finding is aligned with Cai et al. (2012) who find that CSR does enhance sin industries’ firm value in the US. As for Indonesia, one possible reason for positive impacts occurrence might be due to being a developing country that values business activities supporting the community, in accordance with Carroll (2004). Hence, the second hypothesis (H2) is accepted.

Table 4. Regression Result of CSR and Corporate Image in Sin Industries
Model 11 12 13
Dependent Variable CI
Independent Variable CSRImp 0.122 0.687***
(0.408) (0.000)
Control Variables SIZE -0.565 -0.369
(0.112) (0.111)
AGE 0.193 -0.132
(0.546) (0.713)
PFP 1.089 -2.137
(0.559) (0.107)
IND Yes Yes
Constant 12.222*** 13.251*** 16.256***
(0.001) (0.003) (0.000)
Output N 35 35 35
P-value of F-stat 0.408 0.433 0.001***
r2 0.024 0.078 0.225

b. Corporate Social Responsibility (CSR) and Financial Performance
While CSR has significantly positive impact towards sin industries’ corporate image, opposite result occurs on its impact against firm’s financial performance. Model 23 in Table 5 shows negative value of -0.585 with 5% level of significance. This finding indicates that even though CSR improves corporate image, Indonesian investors still neglect to invest in sin industries. This phenomenon is aligned with Hong and Kacpercyzk (2009) who find that investor refusal still occur as an impact of the unethical nature of sin industries’ businesses. Consequently, CSR in sin industries is considered as additional costs that will reduce firm’s profitability (Waddock ; Graves, 1997). Therefore, the fourth hypothesis (H4) of this research is accepted. For the control variables used, firm’s size is proved to have significant positive impacts towards firm’s financial performance, aligned with previous studies that discover positive relationship between them (Barnett ; Salomon, 2012; Garcia-Castro, Arino, ; Canela, 2010; Prior, Surroca, ; Tribo, 2008).
.

Table 5. Regression Result of CSR and Financial Performance in Sin Industries
Model 21 22 23
Dependent Variable CAR
Independent Variable CSRImp -0.151 -0.585**
(0.326) (0.016)
Control Variables SIZE -0.003 0.367*
(0.992) (0.067)
LEV -0.425 -0.304
(0.173) (0.295)
OWN Yes Yes
R;D 1.766 -1.787
(0.346) (0.428)
IND Yes Yes
Constant 20.937*** 20.846** 33.663***
(0.000) (0.015) (0.001)
Output N 35 35 35
P-value of F-stat 0.326 0.432 0.085*
r2 0.031 0.056 0.183

c. Corporate Image and Financial Performance
On the other hand, the relationship between corporate image and firm’s financial performance in sin industries is observed to be statistically insignificant, as can be found in Table 6, specifically in model 31 and 33. This finding shows that Indonesian investors are indifferent to sin industries’ image, represented by total Facebook engagement when making a decision to invest. This discovery is not in accordance with Mizik (2014) who finds that good corporate image will upgrade firm’s financial performance. One possible reason in regards to this research finding is the absence of “compensatory effect” because of the unethical nature possessed by sin industries (Hong & Kacpercyzk, 2009). Hence, there is not sufficient proof to reject the sixth hypothesis (H6) of this research.
Table 6. Regression Result of Corporate Image and Financial Performance in Sin Industries
Model 31 32 33
Dependent Variable CAR
Independent Variable CI 0.187 0.110
(0.329) (0.612)
Control Variables SIZE -0.003 -0.027
(0.992) (0.928)
LEV -0.425 -0.376
(0.173) (0.251)
OWN Yes Yes
R&D 1.766 1.348
(0.346) (0.504)
IND Yes Yes
Constant 20.655*** 20.846** 22.825**
(0.000) (0.015) (0.016)
Output N 35 35 35
P-value of F-stat 0.329 0.432 0.548
r2 0.030 0.056 0.065

CONCLUSIONS
Since previous studies show inconclusive results regarding the benefit of executing Corporate Social Responsibility (CSR) in business practices, this study aims to determine the impact of CSR implementation towards corporate image and firm’s financial performance in Indonesia. This study is getting more interesting as Indonesia is the first nation in the world that makes CSR mandatory and regulated in law. The population of this research include all of 25 stocks listed in SRI-KEHATI Index and 6 stocks included in “Triumvirate of Sin” (alcohol, tobacco, and gaming industries). Data for measuring CSR implementation and corporate image are taken from each company’s Facebook page in year 2017. For measuring firm’s financial performance, this research uses event study, while for determining the relationship between CSR, corporate image, and financial performance, multiple regression is conducted.

After conducting event study, this research finds that Indonesian market reacts significantly positive towards CSR implementation in both ethical and sin industries. However, ethical industries gain lower abnormal return and significance level compared to sin industries. From multiple regression results, this study discovers that CSR has positive impacts on both ethical and sin industries’ corporate image. On the other hand, CSR implementation leads to unfavourable sin industries’ financial performance. While for the ethical ones, CSR has insignificant impact against firm’s financial performance. Last but not least, sin industries’ corporate image has no significant effect on the company’s financial performance. Whereas ethical industries gain opposite result; good corporate image will lead to better financial performance.

These research findings suggest that sin industries should implement CSR in their business practices, as it will positively impact corporate image as well as abnormal return. Ethical industries’ should also implement CSR in their business practices, as it will lead to better reputation for the company. Furthermore, investors should pay attention to CSR announcement on the company’s Facebook page to obtain maximum return. Future research can be improved by using larger sample size, longer period to be analysed, another country with different cultures and CSR literacy level, and adding another social media platform to compare. Last but not least, future research should ascertain whether abnormal returns actually occur due to CSR execution and not from other corporate news informed at the same time period that might trigger investors to invest.