Dirk Simons, Professor of Business Administration and Accounting at the University of Mannheim, is Principal Investigator of three TRR 266 projects. In project A06 “Context-Based Disclosure Incentives”, he examines how context-dependent incentives affect firms’ disclosure behavior and how this impacts transparency and stakeholder decisions. In project B06, “Transparency and Transfer Prices”, he investigates how increased tax transparency influences corporate decisions as well as audit strategies of tax authorities. As one of the academic project leaders of the German Business Panel he aims to open the black box of firms to contribute to evidence-based regulation.
Who, how, what – why, why, why?
I was a huge fan of Sesame Street – and the German theme song: Who, how, what – why, why, why? This is how the world should be explored: by asking these questions. This childlike curiosity about unanswered questions is one of the reasons I became a professor of accounting. For me, accounting is basically information economics – and a search for answers to the question: with whom should one share which information, when and why? And this is exactly what our transparency research that we conduct within the TRR 266 is about. These seemingly simple questions address complex issues to which there are no simple answers – and this is what appeals to me: I love to unravel the unanswered. In addition to my fascination for the field as well as for scientific research in general, the inspiring and supportive environment I experienced at the chair of Hermann Jahnke as a doctoral student was decisive for my decision to become an accounting professor.
You need a network of researchers from different fields and with different backgrounds to discuss issues controversially in a trusting environment.
TRR 266: inspiring network
Within the TRR 266 I can discuss these kinds of questions with a lot of interesting researchers. With researchers the TRR 266 introduced me to and with old companions the TRR 266 has reunited me with. The collaboration and exchange are highly stimulating. There are a lot of exciting questions coming up and we have the chance to analyze these questions from many different angles. Recently, I discussed the implementation of a public country-by-country reporting (CbCR) with a fellow TRR 266 researcher. Associations with a medieval pillory came up quite quickly. Since both of us had limited knowledge about the pillory as a legal instrument, we turned to a historian – I met at the European University ENGAGE.EU, an initiative I initiated with a few international colleagues – to work out differences and similarities in more detail. Due to the joint exchange the initial question has developed and differentiated considerably beyond its original scope – and will maybe result in a research paper. This shows once again how important associations like the TRR 266 and ENGAGE.EU are. There are so many questions you cannot answer as an individual researcher. You need a network of researchers from different fields and with different backgrounds to discuss issues controversially in a trusting environment – and develop new research questions. And for me this means a lot of fun!
Democracy and participation are topics dear to my heart.
Transparency: the essence of our societal form
There is another aspect my commitment to ENGAGE.EU and the TRR 266 have in common: democracy and participation are topics dear to my heart. ENGAGE.EU aims to make the EU tangible for young researchers. They have the opportunity to come together at nine different locations all around Europe, to exchange ideas, to discuss research – and to grow beyond the horizon of their own university and country. And this is important for the formation of experience, for science, for democracy. As a convinced European, I’m a big fan of the initiative. On the other hand, an essential characteristic of democracies is a relatively high degree of information sharing – which brings us back to the TRR 266 and transparency research. Transparency is the essence of our societal form. However, transparency always has two sides. I still believe that there is information that should not be made public. Maybe you remember Thomas de Maizière’s (former Federal Minister of the Interior (Germany)) answer to journalists asking for the reasons for a cancelled international soccer game of the German national team in 2015: “Please understand that I would not like to give an answer. Why? Because some of the answers would unsettle people”. That was a very infelicitous form of transparency, which could easily have led to panic reactions. In business and economics we call this a coordination problem.
We investigate how coordination problems can be solved through the right level of transparency.
Coordination problems: to report or not to report?
In our project A06 we deal with institutional solutions for coordination problems. A neat example of a miscoordination of actors are the so-called bank runs, where many individual lenders pull their money out of a bank at the same time. This is not because investors have explicitly coordinated their actions. It is because they have information that leads them to conclude that it is better to pull the money out of the bank. We investigate how such coordination problems can be solved through the right level of transparency. What should be reported? And what should be kept secret if one does not want to cause panic? For example: Should one always report on the historical cost or on the fair value less costs to sell? Or are there better reporting options?
In the working paper Enforcement and Disclosure we examine what happens when firms are not allowed to actively lie but have the opportunity to conceal information.
Talking about enforcement and disclosure
In the working paper “Enforcement and Disclosure”, for example, we examine what happens when firms are not allowed to actively lie but have the opportunity to conceal information – while being held financially accountable if an audit reveals that important information has been concealed. What incentive effects does that have for firms? And how does it affect their reporting behavior? This is of particular interest to policymakers and regulators, as they need to know how regulations affect firms’ actions to implement effective rules. In our study, we compare different combinations of different reporting requirements and enforcement. Does this encourage firms to report more truthfully or will the decrease of voluntary disclosure outweigh this improvement?
In project B06, we investigate how tax transparency affects corporate investment and reporting decisions as well as the audit strategies of tax authorities.
More transparency, more tax fairness?
In project B06, we investigate how tax transparency affects corporate investment and reporting decisions as well as the audit strategies of tax authorities. Does more transparency lead to more tax fairness? Or does it also have negative effects – e.g. for firms? Country-by-country reporting, for example, not only increases tax transparency, but – in the absence of an adequate compensation mechanism – also the risk of double taxation. The CbCR obliges multinational firms to disclose how much profit, taxes and employees they generate, pay and employ in each country they do business in. This information is available to the tax authorities of all countries the company operates in. In doing so, the tax authorities can more easily assess whether they have received too little tax revenue and should initiate a tax audit. To avoid double taxation, the country that has received too much tax revenue must be willing to return the excess tax revenue. Since the CbCR alone doesn’t incentivize such tax returns, the OECD proposed to solve the problem of double taxation through mandatory fiscal arbitration.
The low-tax country has no incentives to conduct a tax audit without arbitration.
Country-by-country reporting: need for arbitration?
In our paper “Incentive effects of tax transparency: Does country-by-country reporting call for arbitration?” we examined model-theoretically how a CbCR in combination with fiscal arbitration approaches actually affects the quality of tax auditing in the respective countries. Our results show that even in the absence of fiscal arbitration, increased fiscal transparency due to CbCR leads to a higher tax-audit quality in the high-tax countries. Here, the expected benefits of auditing increase due to CbCR because tax authorities are able to identify more precisely the firms which are prone to profit shifting. Therefore, scarce tax audit capacities can be assigned more efficiently. In contrast, the low-tax country has no incentives to conduct a tax audit without arbitration. The effect of fiscal arbitration on tax-audit quality depends on the arbitration approach applied.
For me, research does not stop with the research paper. I am always looking for ways to make my research accessible to practitioners, policymakers and the public.
Going beyond research papers: making a difference
As a model theorist, I develop economic models like this. These models can be very abstract sometimes, but they represent real consequences and can provide policymakers, companies and regulators with crucial information for their decision-making. This is why, for me, research does not stop with the research paper. I am always looking for ways to make my research accessible to practitioners, policymakers and the public – and to discuss my findings with them. This is why I am committed to associations like the Schmalenbach-Gesellschaft, that foster the exchange between researchers and practitioners. Of course, you have to lower the level of abstraction of models considerably – but that works surprisingly well and it’s worth it. And of course, such an exchange is not a one-way street. I always receive important feedback for my research and have the chance to find out what firms, regulators and policymakers are currently concerned about. This in turn leads to new research questions – and ultimately to research that can really make a difference, because it deals with the pressing problems.
With the GBP, we contributed to open the black box of firms.
German Business Panel: opening the black box
This is also a reason why the German Business Panel has become so successful. Together with other TRR 266 researchers from the University of Mannheim, I regularly survey firms about their assessments, opinions and fears – from a classic business perspective. Especially at the height of the Corona pandemic, it became obvious how much medium-sized firms were waiting for this opportunity. The firms had profound concerns and wanted to be heard. Through the GBP, they had and still have the opportunity to raise their voices, to exert influence – without having to fear for their data. On the basis of the large data pool we were able to build over the last years, we can examine business-related questions that would have remained unanswered without this data. And this, in turn, also allows us to provide important guidance to policymakers and regulators on how to form better regulation. With the GBP, we contributed to open the black box of firms. Small and medium-sized firms are somewhat neglected by research, since the data is difficult to obtain. We help to change that. We make our anonymized data accessible to other researchers. Anyone who wants to take part in our research is cordially invited to do so. There are so many exciting questions waiting to be deciphered. And this works better together.
*The article reflects the opinion of the researcher and not necessarily the views of the TRR 266. As a scientific association, the TRR 266 is committed to both freedom of speech and political neutrality.