Debt, Profitability, and Corporate Social Responsibility – A Political Economic Theory Analysis

This study aims to provide empirical evidence of the effect of short-term debt (STD), long-term debt (LTD), and return on assets (ROA) on corporate social responsibility disclosure (CSRD) and how the impact the Covid-19 pandemic (covid) has on the effect of STD, LTD, and ROA on CSRD. The research sample is a manufacturing company listed on the Indonesian stock exchange and observed from 2015 to 2021. Our study shows that STD does not affect CSRD, but LTD has a negative effect on CSRD. Based on CSRD indicators (social, environmental, economic disclosure), the results show that LTD has a negative effect on social and environmental disclosure. However, LTD has a positive effect on economic disclosure. The covid has caused LTD to have a positive effect on CSRD. These results show that during the covid, which caused a decline in financial performance, companies used CSRD as a tool to gain legitimacy and build investor confidence in the company’s financial performance. This study also shows that ROA has a positive effect on CSRD, and the covid has no effect on the effect that ROA has on CSRD.


Introduction
The environmental damage in all countries causes individual and community awareness to increase awareness of social and environmental problems.Their spirit is to encourage sustainable development in all sectors, primarily to benefit the environment in the long term.Various countries have issued regulations to reduce and ensure that company operations do not have negative environmental and social impacts.The Indonesian government has issued Law Number 40 of 2007.This regulation requires companies to allocate 2% of their profits to CSR activities.In addition, Financial Services Authority Regulation (OJK) Number 51/POJK.03/2017requires companies in Indonesia to disclose their CSR activities in their annual reports, as mandated by OJK Number 51/POJK.03/2017.The World Business Council for Sustainable Development defined CSRD as the continous commitment by corporation to

Hypothesis Development
Legitimacy theory is a generalized assumption that the act of an organization are desirable, proper, or appropriate within some socially created system of norms, values, beliefs, and definitions [21].Legitimacy is a process of form through which a corporate seeks support from groups in society.In the legitimacy theory approach, companies will express their concern for social, economic, and environmental issues to gain legitimacy from society, trust from investors, and improve corporate reputation and consumer loyalty [22] [23].
Based on this approach, companies that are under pressure from stakeholders will look for ways so that the company's operations continue to gain legitimacy from society.An institutional approach also supports this opinion.The institutional theory argues that companies obtain institutional pressure, companies will exert powerful influence, and managers' strategic decisions are encouraged to increase legitimacy from society [24].Thus, the awareness of CSR issues helps companies gain sociopolitical legitimacy, gain positive stakeholder responses and gain political access [14] [25].
One form of pressure that can influence firm manager policy is debt.Debt is alternative funding for companies apart from the owner, so debt becomes an alternative to expanding the scale of production and investment.However, enormous debts cause the potential for failure of the company's operations due to cash outflows to repay debts which may be greater than cash receipts and impact financial distress [26].Thus, CSRD is a tool for companies that have a large STD to build an excellent reputation so that companies renegotiate the conditions of their loans at maturity [27] or experience financial difficulties.H1: STD has a positive effect on CSRD.
Apart from STD, companies can also access LTD as a source of funding for investments that have long-term returns.New companies or companies that open new branches and products take a long time to reach the break-even point (BOP), so funding from LTD is chosen to open new branch offices.Moreover, company investment to produce green products, waste management technology, etc., requires high costs and has long-term benefits [28].
Even though the need for LTD repayments is less urgent than STD, companies need to build an excellent reputation because a top firm reputation increases investor confidence [29], increases access to funding and reduces debt costs [30].Based on the legitimacy approach and political cost theory, companies with high LTD will increase the company's attention to social, environmental, and economic concerns as an effort to build a reputation and reduce the cost of debt.
The political-economic perspective supports this argument, where the theory emphasizes that corporates may pursue their own goals and self-interests, and the social environment in which they exist moderates these rights [31].Therefore, providing CSRD is a tool to defend their self-interests in form to encourage, sustain and legitimize relationships by presenting an image of a supporting society in general.Thus, we develop the hypothesis that companies that have large LTD will increase their CSRD as their tool to increase their legitimacy.In companies in Indonesia, Lolo and Yuliandri [32] and Aini [33] report that debt has a positive effect on CSRD.H2: LTD has a positive effect on CSRD.
The company's concern for environmental and social issues requires high costs.For example, the company adopts a policy to treat waste to ensure that the company's waste does not harm the environment.This policy requires an enormous investment.Companies also need large investments to support companies processing and producing green products.This enormous investment must be supported by profitability so that the company's investment to produce green products does not interfere with cash flow.Thus, profitability will increase the company's concern for social, environmental, and community economic problems through increasing CSRD.Fayad et al. [23] report that the highest profit leads to a better image and legitimacy once the investments are made into human, economic, community, and social development, and environmental protection.In companies in Indonesia, Lolo and Yuliandhari [32] and Wagiu and Mekel [34] report that a firm's profitability has a positive effect on CSRD.H3: Profitability has a positive influence on CSRD.

Methods
We used manufacturing companies listed on the Indonesia Stock Exchange (IDX) as sample research and observed for seven years (2015-2021).Of the 178 listed companies, only 23 issued consistent sustainability reports.Based on balanced data methods, we use 161 firm years as unit of analysis.
Following Ates [35], we measure CSRD (CSRD) based on the Global Reporting Initiative standard (GRI) indicators.GRI indicators use three aspects of performance as CSRD measurement: economic (ECO_CSRD), environmental (INV_CSRD), and social disclosure (SOC_CSRD).The economic disclosure is measured by using nine items; the environment disclosure consists of 34 items and the social disclosure consists of 16 items [36].
The total CSRD score determines content analysis by checking the availability of information about GRI items in sustainability reports published by companies.Score 1 for each item that is disclosed and zero for others.The CSRD score is calculated by the ratio of the disclosure score to all GRI items.
Another measurement of variables is presented in Table 1.The results of the study show that STD has no effect on CSRD.This finding shows that firms having high short-term does not cause them to increase their CSRD to improve their image to creditors.The test results based on each CSR performance also show that STD does not affect social, environmental, and economic disclosure.In the legitimacy theory and political economic theory approaches, companies need to improve their image to support the interests of individual organisations.STD has the consequence of funds leaving the company in the short term.Large cash outflows will threaten the sustainability of the firm's operation, requiring the rescheduling of maturing debts.Increasing reputation through CSRD can facilitate the achievement of this goal because CSRD improves corporate reputation and consumer loyalty [22] [23].However, because the sample has a small average STD to assets (28.5250%) and does not endanger the sustainability of the company's operations, the company does not need a strategy to improve its reputation through increasing CSRD.
The Covid moderation test result on the relationship between STD and CSRD showed that the Covid did not moderate the relationship between STD and CSRD.The director must anticipate STD that causes cash outflows in the short term.Moreover, Table 2 shows that companies have STD that tends to be small, so the crisis due to the Covid does not cause companies to have any difficulty paying it, and companies do not need to reschedule their debts.Thus, companies do not use CSRD as a tool to improve reputation as an effort to increase the trust for creditors.In general, our test results show that STD does not affect CSRD, as reported by Kusumawati [37].
Table 4 also reports that LTD has a negative effect on CSRD.Based on the testing of each CSRD indicator, the results show that LTD has a negative effect on social disclosure and environmental disclosure.However, testing model 4 (Table 4) shows that LTD has a positive effect on economic disclosure.The results indicate that companies that have LTD reduce CSRD.This result is different from the findings reported by Aini [33] and Lolo and Yuliandhari [32] that companies that have large debts tend to increase CSRD.This study identified that companies that have debt in the long-term focus more on economic performance to support the company's ability to pay debts received by reducing their concern for social and environmental issues.This method was adopted because the company's concern for social and environmental issues increases costs and reduces the owner's rights [38], so the company's concern for social and environmental problems will reduce the company's ability to pay LTD.
The results of the study show that the Covid has caused LTD to have a positive effect on CSRD.The global Covid has reduced company performance and reduced the company's ability to pay its debts.In this condition, the company needs the trust of society and investors to continue to invest in the company.CSRD is to obtain sociopolitical legitimacy and obtain positive stakeholder responses.Thereby positively increasing investor confidence and company performance [14] [25].Moreover, the covid is increasing social and environmental problems.On the other hand, the Covid has increased public awareness to care about social and environmental issues.Thus, the Covid can cause companies that have a large LTD to increase CSRD.
Companies' concern for CSR requires high costs, so companies that have large profits have the ability to invest in production machines that are environmentally friendly and implement waste treatment systems that do not harm the environment [38].So, this study reports that ROA has a positive effect on CSRD.The test of each CSRD indicator also shows that ROA has a positive influence on social, environmental, and economic disclosure.This result is consistent with Lolo and Yuliandhari [32] and Wagiu and Mekel [34] that a firm's profitability has a positive effect on CSRD.In addition, the effect of ROA on CSRD is because the Indonesian government requires companies to issue a portion of net profit as CSR, so companies with high ROA will issue large amounts of CSR.
Table 4 shows that the Covid has caused ROA to not affect CSRD.The test results for models 2, 3, and 4 also yield the same findings.From the political economic perspective approach, corporates may pursue their own goals and self-interests, and the social environment in which they exist moderates these rights [31].CSR can be used as a tool so that companies can increase legitimacy from society [24], reducing risk consequences [3], reducing firm value [7] [39], and market risk [40].The Covid caused a fundamental reduction in corporate performance, so at this time; the company maintained its performance rather than build the corporate's reputation.

Conclusion
This study aims to provide empirical evidence of the effect of STD, LTD, and ROA on CSRD.In addition, this research aims to prove empirically the impact the covid has on the effect of STD, LTD, and ROA on CSRD.Our study shows that STD does not affect CSRD, but LTD has a negative effect on CSRD.The Covid has caused LTD to positively affect CSRD.These results show that during the Covid, which reduced financial performance, corporate used CSRD as a tool to gain legitimacy and build investor confidence in their financial performance.We finds ROA has a positive effect on CSRD and the Covid does not affect the relationship between ROA and CSRD.
This study contributes to the expansion of literature in three ways.First, this study expands the previous literature by examining the effect of debt on CSRD.Companies with high debt approach financial distress and CSRD as a medium, so that companies gain legitimacy and form a good image of stakeholders for company performance, avoiding financial distress.Second, we provide evidence of the impact of short-term and LTD on CSRD.Third, we expand the literature on how the Covid can affect the impact of debt and ROA on CSRD.
The contribution of this research to regulators is to pay attention to corporate that have high CSRD without being followed by good financial performance, which shows that they will CSRD as a tool to build reputation, good image, and investor confidence.For investors, this has the potential to reduce the sustainability of their investment.Regulators also improve education for investors to evaluate the feasibility of a safe and profitable investment in the long term.
The limitation of this study is that we only use financial risk factors and focus on debt to explain CSRD.Basically, the corporate risks are measured not only from the debt but also from the reduction in financial performance or insolvency risk.Future studies can expand the literature by using other risk indicators that influence corporate policy disclosing CSRD.

Table 3
presents the correlation matrix among variables.This correlation test shows that the highest correlation score is 0.6880 (below 0.7), and this result shows that there is no multicollinearity problem.This result is also reinforced by Table4, which shows that the variance inflation factors (VIF) score is below 5.

Table 4
presents the results of the panel data regression test models 1 and 2. Based on the main research model, we reduce it to 3 more models where model 2 uses social disclosure as the dependent variable.Model 3 uses environment disclosure as the dependent variable and economic disclosure as the dependent variable.

TABLE 4 . Regression Analysis Test.
5%, and 10% significance levels, respectively.We use robust standard error regressions to solve the problems of autocorrelation and heteroscedasticity.Hausman test results in pvalue scores of more than 0.05 recommend using random-effect GLS regressions, and under 0.05 recommend using fixed-effect regressions.