Reeyarn Li, Assistant Professor for Accounting and Taxation at the University of Mannheim, is Principal Investigator of project A03 “Determinants of Textual Transparency”. Together with TRR 266 Research Fellow Benedikt Franke (SKEMA), he investigates how textual financial disclosures affect transparency – and how these effects vary with the regulatory environment. Read more about his views on accounting and research here:
Accounting: a unique perspective
Accounting has been part of my life since my earliest childhood. My mother was an accountant in my hometown. I still remember how she prepared for her accounting exams while at the same time taking care of me. Practically her accounting textbook in one hand, the bedtime story in the other. This resulted in an interest in accounting at an early age. This interest, especially in a scholarly approach to the field, intensified over the years. Accounting research is an incredibly exciting field. It gives us a unique view into companies and helps us understand how and why companies become successful and what makes them fail.
The decision to go to Germany was, among other things, a decision for academic freedom.
For academic freedom
I have been a junior professor at the University of Mannheim since 2016. The decision to go to Germany was, among other things, a decision for academic freedom. I received some really attractive job offers – also from my home country China, including a university in Shanghai with a great research environment and professional reputation. However, if I had chosen Shanghai, I would probably face some restrictions. When it comes to politically sensitive topics, the Chinese government sometimes influences what can and cannot be researched – even in the field of accounting. This happened when a few years ago, China experienced stock market selloffs. The government considered the market crash to be deliberately caused by the opposition within China to challenge the government. As a result, it suddenly became a political taboo to discuss whether companies were currently experiencing financial problems, and if so, for what reasons.
The TRR 266 offers a great research environment, with a lot of academic freedom as well as enthusiasm.
TRR 266: pushing boundaries
My decision for Mannheim was not only a decision for academic freedom but also for academic excellence. Here at the university and in the TRR 266, I can interact with experienced and renowned professors in the field of taxation and accounting. I enjoy working with them and learning from them. The feedback I receive is very valuable to my work. The TRR 266 offers a great research environment, with a lot of academic freedom as well as enthusiasm. Thanks to this transregional research network, we have a lot of opportunity to exchange ideas, and cross the typical boundaries of universities and institutions. Be it conferences, workshops or seminars. With researchers from Mannheim, Paderborn, Berlin, Frankfurt, Munich or Vallendar. This is very helpful, especially for me as a junior researcher. It is a really good opportunity to make contacts, get feedback and learn from other projects and researchers. And naturally also to gain more visibility as a researcher. In a year or two, I would like to take on a new professional challenge – to continue to grow as a researcher.
Transparency is a core theme for me.
Transparency research: natural skepticism
Growing up in China also means being confronted with a culture of silence. Good news is happily and abundantly communicated, negative news is often withheld. This is why I developed a natural skepticism, an instinct to constantly question information disclosed – to scan public reports: Is this true? Is it trustworthy? I’ve always paid a lot of attention to the quality of information. Transparency is a core theme for me. One of my undergraduate professors at Renmin University in Beijing who was doing a lot of research on accounting fraud led the way to the transparency research I’m currently doing. Her courses were very inspiring and enlightening.
We are developing a new approach to make the transparency of textual financial disclosures measurable.
Accounting meets computer linguistics
The quality of information is also the focus of my TRR 266 project A03. We are trying to understand how reliable, accurate, and valid information in financial reports really is. After all, they are supposed to provide detailed information that complements and explains the financial statements. However, it is not uncommon for stakeholders to experience that such financial reports are too long or too difficult to understand – or that they actually provide little reliable information despite being full of words. We are therefore developing a new approach to make the transparency of textual financial disclosures measurable – by using new technologies from computational linguistics (e.g., machine learning).
Currently, we are pursuing a specific approach of topic modeling. With the help of the so-called LDA (Latent Dirichlet Allocation), we are developing a measurement gauge which helps us find out how many of the risk factors disclosed in financial reports are actually relevant – i.e., have the potential to occur as a risk in the course of the current year. After all, more information does not automatically imply more transparency. For example, a company may publish a 3-page report with risk factors, but none of them will occur in the near future. In contrast, a one-page report naming at least one risk factor that is actually realized in the following year would be much more informative and transparent. We are currently working on a working paper based on this intuition.
We have empirical evidence that companies are more likely to make errors in their financial reporting if they are not monitored effectively.
Accounting and jurisdiction
Our project also looks at how politics and accounting interact and influence each other. In a recent working paper, we investigated how lenient legal systems are in dealing with misstatements in financial reports – and what impact this has on the quality of financial reporting. We have empirical evidence that companies are more likely to make errors in their financial reporting if they are not monitored effectively and if there are no strict private legal enforcement. For example, in a U.S. study, we compare firms in California and in Texas. The California federal court system enforces securities law much more strictly than Texas – at the same time, we find that the quality of financial reporting in California is significantly better. Thus, from our research, we can derive an initial key message for regulators and legislators: What you legislate, and the enforcement of existing law, have a significant impact on financial reporting quality.
Perseverance is one of the most important virtues for a researcher.
Working on the projects is great fun. Particularly the collaboration with Benedikt Franke. He is a great project partner. Especially when it comes to bringing in new insights – and new energy. That’s especially important when the project gets bogged down and you’re in danger of losing confidence. Which probably occurs now and then in every research project. Therefore, perseverance is one of the most important virtues for a researcher. After all, sudden breakthroughs are not usually to be expected in accounting research. Rather, it is a matter of advancing the project a little further every day, adding new tests into account, and fine-tuning research designs. This makes it all the more important to learn to appreciate even these small successes, to take pleasure in one’s own research and to remain curious.
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.