The TRR 266 Accounting for Transparency is a trans-regional Collaborative Research Center funded by the German Research Foundation (Deutsche Forschungsgemeinschaft – DFG). Our team of more than 80 dedicated researchers examines how accounting and taxation affect firm and regulatory transparency and how regulation and transparency impact our economy and society. We intend to help develop effective regulation for firm transparency and a transparent tax system. Naturally, we also ensure transparency of our own research.

Katharina Nicolay
Principal Investigator
Project B07: Costs and Benefits of Tax Transparency

 

Johannes Voget
Principal Investigator
Project B07 & A05: Accounting for Tax Complexity

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Investors’ Reactions to Country-by-Country Reporting

08.11.2019

EU citizens should be able to assess whether banks are paying their “fair share of taxes” in the countries they operate in. This call is especially important given the central role of banks and the large number of public subsidies they have received during the financial crisis. This purpose was the line of thought of European Parliamentarians when they, in 2013, quite spontaneously, pushed for a mandatory increase in tax transparency, leading to the political decision to adopt a public country-by-country reporting obligation for EU financial institutions. A team of researchers from the University of Mannheim, including Katharina Nicolay and Johannes Voget, investigated the capital market reaction to this decision. How did investors react to the increase in tax transparency induced by the new legislation?

Dutt, Ludwig, Nicolay, Vay and Voget employ an event study methodology to investigate the capital market reaction to the surprising political decision to adopt a public country-by-country reporting (CbCR) obligation for EU financial institutions.

Dutt, Ludwig, Nicolay, Vay and Voget employ an event study methodology to investigate the capital market reaction to the surprising political decision to adopt a public country-by-country reporting (CbCR) obligation for EU financial institutions. Their results are suggestive of a zero response in our full sample of financial institutions headquartered in the EU. They conduct several sample splits and find that the investor reaction is slightly more negative for banks engaging in selected tax havens and banks with an above-average B2C orientation and slightly more positive for banks with a below-average share of institutional investors. They conclude that investors anticipated a simultaneous reduction in banks’ tax avoidance opportunities and in information asymmetries between managers and shareholders, implying both negative and positive stock price reactions which offset each other on average.

Increasing tax transparency: Investor reactions to the country-by-country reporting requirement for EU financial institutions

Dutt, V.K., Ludwig, C. A., Nicolay, K., Vay, H., & Voget. J. (2019). Increasing tax transparency: investor reactions to the country-by-country reporting requirement for EU financial institutions. International Tax and Public Finance https://doi.org/10.1007/s10797-019-09575-4

LATEST RESEARCH

Margaret Abernethy, Chung-Yu Hung, and Laurence van Lent (Frankfurt School of Finance and Management) examine the association between managers’ expertise and their discretionary bonus decisions in a hospital setting.

Margaret Abernethy, Chung-Yu Hung, and Laurence van Lent (Frankfurt School of Finance and Management) examine the association between managers’ expertise and their discretionary bonus decisions in a hospital setting. They hypothesize that high-expertise managers make decisions that encourage cooperation among their subordinates. However, low-expertise managers cannot do so because their lower levels of knowledge, experience, and domain expertise prevent them from having sufficient personal influence to persuade other professionals to cooperate. They find that high-expertise managers make two types of bonus decisions: (1) keep a smaller share of the bonus pool than what they are entitled to retain and (2) allocate the remainder to subordinates more evenly after adjusting for the underlying heterogeneity in their productivity. They also find evidence that high-expertise managers whose bonus decisions reflect their support for cooperation have higher department performance than all other managers.

Expertise and discretionary bonus decisions

Abernethy, M.A., Hung, C.Y., & van Lent, L. (2019). Expertise and discretionary bonus decisions. Management Science, in press. https://doi.org/10.1287/mnsc.2018.3172

LATEST RESEARCH

Thorsten Sellhorn (LMU Munich) and Katharina Hombach (Frankfurt School of Finance and Management) discuss targeted transparency regulation by securities regulators: corporate disclosure regulation aimed at nudging firms towards changing their business activities in socially desirable ways.

Thorsten Sellhorn (LMU Munich) and Katharina Hombach (Frankfurt School of Finance and Management) have published a review on ‘targeted transparency‘ – transparency regulation aimed at nudging firms towards changing their business activities in socially desirable ways. They focus on targeted transparency implemented by securities regulators, such as recent CSR reporting requirements in the E.U. or mine safety disclosures in the U.S. Interestingly, these targeted transparency rules contradict securities regulators’ traditional missions. Sellhorn and Hombach provide a framework to analyze this emerging type of transparency regulation, and review the emerging empirical evidence. Their analysis highlights instances where targeted transparency regulation achieves policy-makers’ stated objectives. However, there is also evidence of unintended ‘side effects’. Overall, the empirical studies reviewed face challenges in terms of clearly showing that transparency regulation causally affects policy-relevant outcomes. To do better, researchers need support from policy-makers as well as affected firms.

Transparency via corporate
disclosure regulation

Hombach, K., & Sellhorn, T. (2019). Shaping corporate actions through targeted transparency regulation: A framework and review of extant evidence. Schmalenbach Business Review, 71(2), 137-168. Available at: https://doi.org/10.1007/s41464-018-0065-z.

LATEST RESEARCH

Tarek Hassan, Stephan Hollander, Laurence van Lent (Frankfurt School of Finance and Managament) and Ahmed Tahoun adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual US firms: the share of their quarterly earnings conference calls that they devote to political risks.

Tarek Hassan, Stephan Hollander, Laurence van Lent (Frankfurt School of Finance and Managament) and Ahmed Tahoun adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual US firms: the share of their quarterly earnings conference calls that they devote to political risks.

Firm-level political risk:
Measurement and effects

Hassan, T., Hollander, S., van Lent, L. &, Tahoun, A. (2019). Firm-level political risk: measurement and effects. The Quarterly Journal of Economics, 134(4), 2135-2202. https://doi.org/10.1093/qje/qjz021

LATEST RESEARCH

Malte Chirvi and Ralf Maiterth (HU Berlin) discuss the transition to downstream taxation of statutory pensions in German tax law. They discuss how it leads to under- rather than double taxation of public pensions. They show that using the benchmark employed by the jurisdiction and the vast majority of the literature indicates a higher under-taxation (11.4%) than a systematic benchmark (8.4%).

Malte Chirvi and Ralf Maiterth (HU Berlin) discuss the transition to downstream taxation of statutory pensions in German tax law. They discuss how it leads to under- rather than double taxation of public pensions. They show that using the benchmark employed by the jurisdiction and the vast majority of the literature indicates a higher under-taxation (11.4%) than a systematic benchmark (8.4%). Under-taxation of public pensions could be reduced significantly without causing double taxation issues if the taxation of public pensions was increased appropriately. This new system would not have to be adjusted to changes in expected pensions if it was based on the systematic benchmark.

Doppelbesteuerung beim
Übergang zur nachgelagerten
Besteuerung gesetzlicher Renten?

Chirvi, M., & Maiterth, R. (2019). Doppelbesteuerung beim Übergang zur nachgelagerten Besteuerung gesetzlicher Renten? Steuersystematische Überlegungen und empirische Ergebnisse. Steuer und Wirtschaft, 96(2), 130-143.

LATEST RESEARCH

Christian Hofmann (LMU Munich) and Naomi Rothernberg study a principal's choice of whether to produce an imperfect forecast about a firm's outcome either before or after an agent's effort choice. The early forecast affects the agent's effort choice, which means the forecast can also be used to infer information about the effect of the agent's effort on outcome. The late forecast is more accurate because, by working hard, the agent also learns about productivity, implying that the late forecast has an additional performance measurement role.

Christian Hofmann (LMU Munich) and Naomi Rothernberg study a principal's choice of whether to produce an imperfect forecast about a firm's outcome either before or after an agent's effort choice. The early forecast affects the agent's effort choice, which means the forecast can also be used to infer information about the effect of the agent's effort on outcome. The late forecast is more accurate because, by working hard, the agent also learns about productivity, implying that the late forecast has an additional performance measurement role. With verifiable information, the principal prefers a late forecast when the agent's effect on the accuracy of the forecast is either large or small. The agent has consistent preferences when his effect on the accuracy of the late forecast is not too large. With unverifiable information, the agent's information rents imply that the principal cannot use either forecast as a performance measure. Thus, the accuracy of the late forecast has no effect on the principal's preference. However, if the accuracy of the early forecast is low and its decision‐making function is diminished, the principal prefers a late signal.

Forecast accuracy and consistent
preferences for the timing of
information arrival

Hofmann, C., & Rothenberg, N.R. (2019). Forecast accuracy and consistent preferences for the timing of information arrival. Contemporary Accounting Research. Available at: https://doi.org/10.1111/1911-3846.12499

LATEST RESEARCH

Joachim Gassen (HU Berlin), Hollis A. Skaife and David Veenman demonstrate that measures of stock price synchronicity based on market model R2s are predictably biased downwards as a result of stock illiquidity, and that previously‐employed remedies to correct market model betas for measurement bias do not fix R2.

Joachim Gassen (HU Berlin), Hollis A. Skaife and David Veenman demonstrate that measures of stock price synchronicity based on market model R2s are predictably biased downwards as a result of stock illiquidity, and that previously‐employed remedies to correct market model betas for measurement bias do not fix R2. Using a large international sample of firm‐years, they find strong negative and nonlinear relations between illiquidity and R2 across countries, across firms, and over time. Because variables of interest frequently relate to illiquidity as well, they illustrate the consequences of not controlling for illiquidity in synchronicity research. More generally, they demonstrate the importance of using nonlinear control variable methods. Overall, they conclude that the illiquidity‐driven measurement bias in R2 provides an explanation for why prior research finds low‐R2 firms to have weak information environments, and suggest future research carefully evaluate the sensitivity of its results to nonlinear controls for illiquidity.

Illiquidity and the Measurement
of Stock Price Synchronicity

Gassen, J., Skaife, H.A., & Veenman, D. (2019). Illiquidity and the measurement of stock price synchronicity. Contemporary Accounting Research. Available at: https://doi.org/10.1111/1911-3846.12519

LATEST RESEARCH

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JOB POSTS

We invite applications of candidates for Doctoral Researcher and Post-Doctoral Researcher positions. We are looking for candidates with research interests in managerial accounting, financial accounting or taxation. Read more about our job posts here.

UPCOMING EVENTS

28-29 Nov. 2019
TRR 266 Annual Conference
Mannheim

30 March 2020 
1.Forum
Forschung im Dialog

Rechnungswesen, Steuern & Transparenz
LMU Munich

GERMAN BUSINESS PANEL

The German Business Panel will construct a representative panel of managers bearing responsibilities for accounting and tax matters in German firms. Read more here.

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Preventing Collusion

30.10.2019

Organizational design is an important determinant of firm transparency. In a recent study published in Management Science, Anja Schöttner, together with Matthias Kräkel, investigated what happens when a firm delegates more pricing authority to its sales persons. The fundamental problem is that, from the companies’ point of view, the pricing behavior between their sales agents and customers can lack transparency. Kräkel and Schöttner analyze how this problem affects the optimal contract design and delegation of decision rights to the sales agent.

Anja Schöttner
Principal Investigator
Project A02: Transparency Effects of Organizational Innovations

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