Laurence van Lent, Professor of Accounting and Economics at the Frankfurt School of Finance and Management, is principal investigator of project B10 “Corporate Transparency: Unstructured Soft Information, Gossip, and Fake News”. He examines how transparency of soft information (private, qualitative and hard-to-verify) affects price discovery in equity markets as well as product and factor markets – and keeps aclose watch on current issues such as climate change, the coronavirus pandemic or Brexit.
Accounting: all-rounder and troubleshooter
My decision for accounting was a decision for diversity. I just couldn’t get comfortable with the idea of being stuck in a rut at some point, being forced to do the same thing for the rest of my life. Accounting research allows for so many different approaches and issues. In my career, for example, I have investigated money and influence in politics, social norms in organization, how medical professionals respond to bonus schemes, climate change and resilience to the pandemic. Few other fields would allow me to address such a broad range of topics. Over the past years, I also became increasingly convinced that accounting can contribute significantly to solve some of the big problems of our time – in its own unique way: by dealing with transparency questions as well as through measurement.
I still think transparency is essential, but we need a more subtle understanding of its role and, in particular, its limits.
Transparency and its limitations
Back when we started with the TRR 266, I was confident that transparency would solve a lot of issues. Perhaps the zeitgeist at the time, at the height of the Trump presidency and a succession of political scandals primed my thinking into this belief. I still think transparency is essential, but we need a more subtle understanding of its role and, in particular, its limits. Because: Learning about Trump’s egregious misbehavior did not cause voters to abandon him en masse. Press stories about Cambridge Analytica did not end Facebook.
Sometimes individuals willingly ignore information or distort it for their own purposes. That’s why I think it’s important that we also address crucial follow-up questions on transparency. For example: Under what conditions does transparency not work? What happens to information once parties distort, amplify or endorse it? And why are people sometimes unwilling to revise their thinking despite new information?
Measurement is a way to tell us how big the problem is, where exactly it materializes, and who is
affected by it.
Measurement: original superpower of accounting
I firmly believe that many of today’s biggest challenges need measurement in some form or another to be solved. The original superpower of accounting. We already have various tools for this purpose. We just need to learn to apply these tools, which were originally invented for accounting or tax problems, to bigger problems. Take for example climate change. As long as we cannot fully capture the impact of a firm on its environment, we will not be able to change business in a more sustainable direction, since actions that do not get measured will be ignored. Measurement is a way to tell us how big the problem is, where exactly it materializes, and who is affected by it.
One of our key findings is that firms exposed to climate change start to hire more people who have skills relevant to climate change.
Firm level climate change exposure
In November, we will be presenting a TRR 266 working paper on climate change at an NBER conference. We developed a measure that uses earnings calls to determine to what extent firms are exposed to climate change – in terms of opportunities and risks. Our exposure measure captures the proportion of word combinations that signal climate change conversation. A major benefit of using earnings conference calls as a source is that they are much less susceptible to “greenwashing” by management than, for example, annual reports. In these quarterly calls, firms inform analysts about the firm’s activities and future developments. Even if the management is evading the climate change topic or window dressing their achievements, analysts will act as a counterpoint by asking probing questions.
We analyzed transcripts of 10,000 publicly-listed firms from 34 countries over a period of 17 years. The data holds great potential for insights. We can see, for instance, where climate change issues are most discussed or most exposed. And whether that correlates, for example, with physical threats some companies face – such as rising sea levels – or with costly regulatory interventions like a carbon tax. One of our key findings is that firms exposed to climate change start to hire more people who have skills relevant to climate change. And we also observe that these firms are more often using new technologies that can provide them with a potential upside to climate change developments.
We use straightforward computational techniques to understand whether, how, and to what extent firms are exposed to politics, climate change, the pandemic,
Project B10: more than the financial status of a firm
This research on climate change is part of my TRR 266 project B10. The project is about using firm disclosures to learn much more about the firm than its financial status. In most papers, we use straightforward computational techniques to understand whether, how, and to what extent firms are exposed to politics, climate change, the pandemic, or Brexit. We can use this information to answer questions that macroeconomists have struggled with for quite a while. For example, in formulating policy responses to the covidvirus pandemic, governments need to assess whether COVID-19 is mostly a shock to demand, meaning people don’t want to buy any goods or services anymore, or a supply shock, where firms are forced to close shops and production facilities.
It is complicated to disentangle these two explanations from aggregate (macro) data. Looking at the disclosures at the firm level can help a lot – and we can pinpoint in which sectors demand is the major problem and which firms suffer predominantly from supply disruptions. Governments can then respond in a tailored way by providing financial support to firms with a supply problem or by offering VAT tax cuts on services where demand has temporarily vanished.
We hope that this approach will help us make our research a starting point for new observations, findings and experiments; for policy decisions and reforms.
Climate Change Lab: sharing insights
We want to make our research and results readily available. To other researchers, policymakers and the general public. Within the scope of my research on climate change I have founded the Climate Change Lab with some colleagues from Frankfurt School and Shanghai University of Finance and Economics. On our website we inform about our research, new publications and presentations; we publish our methods, data and findings. By providing an Open Science Framework Repository, but also in a way that makes it easier for non-scientists to understand the data.
It is also important to us that interested people know how to approach us if they have any questions. We hope that this approach will help us make our research a starting point for new observations, findings and experiments; for policy decisions and reforms. We hope that this approach will help us create a virtual lab where this important issue is advanced by researchers and other experts around the world.
The Climate Change Lab is also a great place for young researchers to learn from our insights and methods of data-driven climate finance Research.
Supporting young researchers
The Climate Change Lab is also a great place for young researchers to learn from our insights and methods of data-driven climate finance research. We therefore encourage PhD students to join us. Doctoral education is truly a matter dear to my heart. Whether in the Climate Change Lab, at the Frankfurt School or in TRR 266 – I am always available for advice, feedback and discussion on research and research ideas. I find this close exchange crucial. And I very much appreciate the fact that the TRR 266 also attaches great importance to this. Besides the opportunities for exchange, there are also many other opportunities in our research network for young researchers to grow– both professionally and personally. Through workshops, conferences, staff rotation and much more.
As a researcher, I can only contribute to a small portion of the solution of a problem. The overall solution to the problem requires a massive collaborative effort.
TRR 266: exchange, social media and open science
I personally benefit from the TRR 266 in many ways as well. The network is just great: the exchange with all these smart tax and accounting researchers is real fun – and it lets my research grow as a result. The TRR 266 also helps me to think outside the box – and, for example, encourages me to be more active in science communication and on social media. I discovered Twitter as a platform that helps to stay informed about current research in related fields. And it also breaks down barriers: it makes it easier to get in touch with other researchers and exchange ideas. I appreciate that very much.
Of course, the TRR 266 also offers great support when it comes to Open Science. With training, workshops and much more. This is very valuable. The more people conduct Open Science, the better. Because you have to be aware: As a researcher, I can only contribute to a small portion of the solution of a problem. The overall solution to the problem requires a massive collaborative effort. Open Science creates the conditions for this collaboration. Moreover, Open Science helps to make research and its limitations more transparent. Maybe, in the long run, it helps create favorable conditions for an informed debate about what research can and cannot achieve – and thus to a more differentiated understanding of science.
*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.