Jannis Bischof, Professor of Accounting at the University of Mannheim, is Principal Investigator of the project A09 “Voluntary Disclosure”. Together with his team, he examines how firms create transparency by voluntary risk reporting and how this is shaped by firm- and manager-specific preferences. Furthermore, Bischof is one of the academic project leaders of the German Business Panel, the long-term survey panel of the TRR 266.
Unraveling the unanswered
During my business studies, I became increasingly aware that information is a decisive element of many interactions – as are information asymmetries. How these asymmetries affect transactions and how they can be reduced became a question that I was eager to unravel. This fascination ultimately led me to accounting, because accounting deals with exactly these kinds of questions. One of my main research interests is on the finance and banking sector. Information and transparency play a major role and also an ambiguous one: Is it always beneficial to let banks disclose all information about their risk positions? Or does it also contribute to excessive uncertainty on the market? These are questions to which there are no obvious or simple answers, since there are many opposing effects – I find this highly appealing about the research in this field.
The more unique and tailor-made the data, the more likely the findings are to make a difference.
The more innovative the data, the more relevant the impact
Empirical data clearly plays an important role in answering these questions. I place great emphasis on innovative data. After all, the data should correspond as closely as possible to my research question. Therefore, I have to sometimes invest a lot in data collection, and I am certainly not only talking about the financial investment here. Generating innovative data can be very time-consuming and methodologically demanding. But the effort is worth it: the more unique and tailor-made the data, the more likely the findings are to make a difference. Another important prerequisite, of course, is to analyze the data with rigor – and becoming able to distinguish between casual correlations and causal effects. Empirical methodology has advanced a great deal in this area. The fact that last year’s Nobel Prize in Economics went to a group of econometricians who have decisively shaped this very progress shows once again how important careful empirical identification should be for researchers.
We believe in the benefits of open science and share our findings as well as all anonymized micro data with the public.
German Business Panel: inside the companies
With the German Business Panel (GBP), we have established a long-term survey panel that differs from many established economic panels. While these panels primarily aim to understand economy-wide effects, we take a look inside the companies. We collect data that help us understand how managers make decisions, and how these decisions interact with the cost and incentive structures of a company, its strategies and internal processes. This is crucial, for example, to understand how the design of state aid programs affects corporate outcomes. This question became urgent during the Covid-19 crisis – and it is one of the questions we addressed in our research. Of course, we do not conduct this research behind closed doors. We believe in the benefits of open science and share our findings as well as all anonymized micro data with the public – for example, in monthly reports or via public use files. Panel members can also get access to special industry reports. And we also report to government institutions, such as federal or state ministries. In doing so, we hope to contribute to better regulation – a benefit for economy and society alike and, of course, for each company.
Insights on topical issues: How does the war in Ukraine affect firms in Germany?
In our monthly reports we aim to address the most topical issues. In March and April, we documented how the war in Ukraine and the imposed economic sanctions are affecting firms. A lot of companies are confronted with great uncertainty due to the current developments, either because they have production or distribution sites in Ukraine and Russia or because they suffer from increased energy prices and bottlenecks in global supply chains. We are able to track the data and illustrate the impact of this uncertainty on the financial data and managerial decision-making in German companies.
We want as the German Business Panel to become a central data provider for business-related questions, especially on the relations between internal managerial decisions and processes and financial outcomes.
Voluntary disclosure: opening the black box
In the long run, we want as the German Business Panel to become a central data provider for business-related questions, especially on the relations between internal managerial decisions and processes and financial outcomes. Therefore, we plan to increasingly utilize our data for genuine scientific purposes, not only for the research within the TRR 266, but also beyond. The larger our data pool becomes, the more opportunities there will be for high-level scientific research. For my TRR 266 project A09, the GBP data is of great importance. In the project, we examine voluntary disclosure. In other words, we address the deliberate choice of a company to create transparency – without being forced by mandatory disclosure regulations. We investigate how managers arrive at this decision, which is very difficult to observe from the outside and, thus, something like a black box. The aim of our project is to open this black box and understand how internal processes and structures shape these kinds of decisions. The GBP data can serve as a kind of box opener.
In a recent publication in the Journal of Financial Economics we show that banks have very little incentive to disclose their risk positions voluntarily.
Voluntary disclosure of banks: well-designed regulation is key
In a recent publication in the Journal of Financial Economics, we study the voluntary disclosure behavior of banks – and address the question: How do we achieve financial stability? And what role can transparency regulation play in this? We show that banks have very little incentive to disclose their risk positions voluntarily. Banks tend to react only when there are already rumors in the market – and only by confirming these rumors. This leads to increasing uncertainty among investors and decreasing trust in the banks’ management. Using the example of the investment bank Bear Stearns, we show that its collapse during the 2008 financial crisis was the consequence of such a loss of trust and reputation, which results from opaque and incomplete reporting. This lack of voluntary disclosure can only be countered by well-designed regulation. The study shows that it is not only important to establish effective rules, but also to provide public agencies with sufficient resources and competences to enforce these rules.
[The findings from another recent publication] seem of particular relevance in the context of the recent economic downturn during the COVID-19 pandemic and the ongoing war.
Efficient legal systems accelerate reduction of non-performing loans
This is also an important finding from another recent publication in the European Accounting Review. The paper focuses on the development of non-performing loans (NPLs) during and after the financial crisis. Regulators classify a loan as “non-performing” when a bank’s borrower is no longer able to make the contractual payments. High levels of NPLs have a negative impact on banks’ stability, bank lending and economic activity. Therefore, a quick reduction of non-performing loans, particularly after an economic downturn, is important to promote lending and maintain bank stability. In our study, we show that an efficient legal system accelerates NPL reductions by facilitating the workout of the existing NPL stock during the economic recovery after a crisis. These findings can guide regulators, policymakers and supervisors in managing high levels of NPLs in the future. This seems of particular relevance in the context of the recent economic downturn during the COVID-19 pandemic and the ongoing war that will likely result in NPL increases in the future.
Our research can only make a difference when we make our findings visible and easily digestible for a broad audience of policymakers, regulators, and managers.
Making research findings visible
Since both studies have great practical and political relevance, we decided to distribute our key findings via blog posts – via The FinReg Blog of Duke Law School and the SAFE Finance Blog of the Leibniz Institute for Financial Research SAFE. This will make the findings more accessible to decision-makers in politics and regulation. I consider it very important to not only publish our findings in international top journals, which are primarily read by a scientific audience. Our research can only make a difference when we make our findings visible and easily digestible for a broad audience of policymakers, regulators, and managers. This is why I am also very happy to be a member of EFRAG’s Financial Instruments Working Group. Within this working group I can share research findings that could help decision-makers to make better informed decisions. At the same time, policymakers and standard setters discuss current topics there that are highly relevant to them. This provides me with new ideas for my research.
On the one hand transparency can have a positive effect on the stability of the financial market, but on the other hand negative effects are also conceivable.
TRR 266 Forum: about transparency and financial stability
I am really looking forward to a prolific exchange with policymakers, decision-makers in firms and standard setters at our TRR 266 Forum in May. At this public outreach event I will lead a panel discussion that focuses on the question: How can accounting and transparency contribute to financial stability? This is a question that offers much food for discussion. On the one hand transparency can have a positive effect on the stability of the financial market, but on the other hand negative effects are also conceivable. Just think of the following: the more information is exposed to the market and therefore also to non-professional players, the higher the risk of misinterpretations and, thus, investor panic. I am very much looking forward to the different views as well as to a lively discussion that will hopefully lead to increased knowledge for all parties involved.
*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.