Effects of Transparency
While project area A examines how transparency is being established, project area B focuses on the internal and external effects of transparency. Effects of transparency can result from multiple mechanisms that are crucial to identify and understand. While external effects of firm transparency in capital markets have been studied extensively, within-firm consequences of transparency or effects on product and labor markets have been somewhat neglected by prior literature. For example, we know very little about whether transparency affects the market position of a firm in the labor market or how firm- and industry-level transparency is linked to product market competition. Moreover, even research on capital market effects of transparency is mostly limited to public firms and relies on readily available archival data.
Project area B is designed to address these shortcomings. It does so by:
using insights from project area A by incorporating the identified determinants of information flows and transparency as observable covariates.
identifying context-dependent mechanisms that give rise to intended and unintended effects of transparency.
testing the theoretical predictions along these predicted mechanisms by exploiting settings that allow for causal inference.
What are the effects
Jacob and Sureth-Sloane explore the effect of taxes and tax-related transparency on different types of investment. They study not only how taxes affect investment, but also under which conditions effects may be stronger or muted. They comprehensively examine the combined effect of a broad set of taxes on an array of business decisions and how transparency about various tax regimes translates into decisions. Furthermore, they study how tax regimes affect investments differently across investment types. Finally, they explore the heterogeneity in tax effects and the spillover effects of taxation on corporate stakeholders.
Gassen and Kosi investigate the effects of private firm financial reporting transparency as private firms constitute a central part of economic activity and as the less complex environment of private firms allows for cleaner identification of underlying mechanisms. They study how information spillover effects across private firms with more or less strict reporting requirements affect the investment efficiency of private firms. In addition, they explore the effect of private firm transparency on the market for mergers and acquisitions and how private firm transparency interacts with the labor market.
Hofmann explores how variations in transparency regulation affect tradeoffs regarding performance monitoring and the design of the firm’s organizational structure. Specifically, B03 focuses on the effect of the regulated transparency environment on the optimal allocation of authority within a given hierarchy, the optimal design of the hierarchy in terms of span of control and the depth of the hierarchy, and the promotion of individuals within a hierarchy. The theoretical findings of B03 will highlight a significantly underexplored real consequence of transparency and will be tested based on survey data collected in coordination with B04 and C01.
Gassen, Müller, and Sellhorn investigate the impact of financial transparency on investment and product markets. They first collect field evidence, in cooperation with B03 and C01, via surveys and interviews with standard setters, users, and firms on how financial reporting generates real effects on investment and product markets. The subsequent subprojects will test the suggested mechanisms using observational data. B04 will use regulatory innovations to test for real effects of transparency on diverse outcomes such as firm location choices, consumer activism, environmental policy choices, pension plans, lease contracts, and incentive systems.
Olsson and Sievers reinvestigate how financial reporting transparency can be measured in the equity market. B05 teams up with A03, A08, B10, and C02 in constructing an extensive dataset describing the financial reporting behavior of publicly listed firms. Using these data and exploiting market reactions around exogenous macro news events, it will identify financial reporting components that are theoretically and empirically connected to equity capital market outcomes. Based on these insights, it will revisit prior evidence on the capital markets effects of financial reporting information and explore whether refined measures of financial reporting transparency can help to improve company valuation.
Ortmann and Simons investigate how increased transparency in transfer pricing influences (i) corporate reporting decisions, (ii) tax authority incentives, and (iii) economic outcomes such as tax revenue and the allocation of investments among countries. Using a theoretical approach, they contrast two competing transparency regimes. They study a regime mandating a high level of transparency (country-by-country reporting) under which tax authorities are able to monitor transfer prices. Furthermore, they analyze allocations of taxable income relying on a formula-based distribution procedure. While such procedure prohibits conventional accounting-based profit shifting through transfer pricing, it might cause real effects.
Müller, Nicolay, and Voget focus on the interplay between voluntary and mandatory tax reporting that jointly determine tax transparency. By establishing a holistic view of tax transparency, they strive to understand what drives the decision of firms to become tax transparent and to assess its consequences. Using data from voluntary as well as mandatory tax-related disclosures such as the newly required country-by-country reporting, B07 will enhance our understanding of the role of tax transparency, the costs and benefits of tax disclosure, and the interplay of tax and financial accounting in shaping firm behavior and ultimately the transparency of publicly listed firms.
Maiterth and Sureth-Sloane study the extent to which tax burden misperceptions influence individual and firm decision-making. In this context, transparency about one’s own tax burden as well as about the tax burden of other market participants is relevant. Misperceptions will be identified empirically on the basis of surveys and experiments. In addition, B08 examines in how far tax burden misperceptions influence the legislative process and whether these misperceptions are intentionally generated by interest groups.
Franke and Kosi investigate the demand of debt providers for financial information. As a first step, they explore debt-market related transparency regulation and identify the effect of this regulation on transparency. Next, they study private firms that issue public debt to isolate the debt market incentives of transparency. Finally, they investigate whether firms’ qualitative disclosure goes beyond what is already contained in quantitative accounting numbers. Taken together, the results will help to understand the matching of demand for and supply of information in debt markets, and thus address the role of debt markets for firm transparency.
Laurence van Lent
Frankfurt School of Finance and Management
Van Lent studies the effects of soft information on corporate transparency. He uses machine-learning technology to explore how partly standardized and unstandardized qualitative information is disseminated by firms and organizations, and how market participants process and act on this information. B10 examines how users perceive information and thereby influence market-wide transparency. A key objective of B10 is to explore to what extent the market mechanism is able to process qualitative information so that rumors, biased narratives and resulting biased beliefs are revised.