How Does Monitoring Mechanism Work to Avoid Idiosyncratic Risk?

Liliana Inggrit Wijaya, Rizky Eriandani, Zunairoh


This study analyzes the impact of corporate social responsibility (CSR) associated with idiosyncratic risk. This study involved corporate governance (CG) in strengthening the negative relationship between CSR and idiosyncratic risk in the Indonesia Stock Exchange to analyze thoroughly. The main design is quantitative research with data processing method used the panel most miniature square regression model with imbalance data for the 2016-2019 period and 551 samples. The results proved that CSR significantly reduces idiosyncratic risk. CSR in the environmental dimension is proven to be more sensitive and robust in reducing idiosyncratic risk. Institutional ownership and independent commissioners strengthen the negative influence of CSR on idiosyncratic risk. The results showed support for the theory of risk management, signaling, and corporate governance mechanisms. The better the CSR performance, the company can manage its resources and give a positive signal to stakeholders because the monitoring mechanism has succeeded in suppressing idiosyncratic risk. This study can be seen from its novelty in relating CSR to idiosyncratic risk by involving a monitoring mechanism for emerging capital markets, namely the Indonesian Stock Exchange. There are still little researches on CSR related to monitoring mechanisms. In addition, researchers concentrated on the idiosyncratic risk because the company's policies drive it.

Keywords: corporate social responsibility, idiosyncratic risk, risk management theory, signaling theory, corporate governance mechanism.

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