Mingran Zhang is in her first year of a PhD in Management. Here, she tells us about her research so far and explains how climate change and financial reporting show a surprising correlation.

What drove you to choose Bath for your PhD?

I received a distinction for my MSc in Accounting and Finance at Bath, and I received tremendous support from the University. One of my current doctoral supervisors, Professor Dimitrios Gounopoulos, was one of my lecturers during the master’s and I was deeply impressed by his academic dedication.

All the professors at our university demonstrate keen insight into cutting-edge topics and there are so many opportunities for PhD students to exchange their ideas and research – this also influenced my decision to pursue a doctoral degree here.


What is your research topic and how did you decide on it?

My current research is studying how firm-level climate change risk affects companies’ financial reporting behaviour. Following the introduction of the Paris Accord in 2016, there are increased concerns and awareness about climate change in the business world.

This climate change risk falls into three categories. The first is physical risk, which comes from the direct negative impact that factors such as an increase in sea level or higher temperatures may have on companies’ productivity and sales.

The second is transition risk: the capital market requires more green stock, which has less greenhouse emissions, so when we approach the 2050 deadline for carbon neutrality, some companies face higher challenges in transforming from high emissions to low.

The third is regulatory risk, because the European government has issued policies around emissions quotas. If you want to pollute more, you’ll have to buy this quota from another company, which will increase your costs – or if you fail to obey the regulations, you’ll face a lawsuit.

Before narrowing down a specific research topic, I proposed many ideas to my supervisor, and he helped me in assessing and analysing each topic, including the availability of data, the feasibility of each topic and the potential for publication.


What initially sparked your interest in the topic?

I think the quality of financial reporting is very important due to information asymmetry: companies’ management are the ones who hold the most information. Shareholders, creditors and governments rely on reporting to gain insight into firms’ financial performance and make informed decisions.

If the quality of this reporting is questionable, transparency in the capital market decreases and the effectiveness of investments can decrease. As a result, I decided to explore why and how companies tend to alter their financial reporting behaviour when they face higher firm-level climate change risk.


What are your findings so far?

So far I’ve examined financial reporting quality from two perspectives: the legal and illegal ways by which firms manipulate their reporting. The legal way is through earnings management, whereas the illegal way is intentionally misreporting financial figures.

After analysing the regression between climate change risk and discretional earning management, I have observed a significant positive relationship – which indicates that when a company faces higher climate change risk, they tend to lower the quality of their financial reports to present better performance. It might be that the company’s leadership has a greater incentive to conceal unsatisfactory performance to mitigate the financial burden and satisfy the demand from the capital market.

I also found that where US stock market firms were investigated and prosecuted by the Securities and Exchange Commission over the past two decades, when they then face higher climate change risk, they reduce intentional misreporting.

Going forward, I’m hoping to prove the mechanism of why climate change risk affects the quality of financial reporting: what's the mechanism or the channel to achieve positive change?


What are the implications for your research in a real-world setting?

Climate change risk is obviously a very topical issue around the world. In June 2017, the Financial Stability Board Task Force on Climate-related Financial Disclosures released its recommendations on disclosure requirements on financial institutions.

Our results suggest that regulators may want to consider extending this disclosure requirement and mandatory standards to cover non-financial institutions as well, because the exposure to climate-related issues could impact their reporting behaviour, too.


What advice would you offer to others studying or considering a PhD?

You need to choose a topic that really interests you and alights your passion. A PhD is a long commitment, so if you have motivation and choose a topic that you really like, it's easier when you face challenges.

You should have the attitude to embrace these challenges, because research doesn't always go as planned. You may suffer some setbacks – it's very normal in PhD study – so learn from difficulties, adapt and preserve. Also, remember you can ask for help from your supervisor: they’re always there.

Posted in: Climate, Finance, PhD, PhD profile, Regulation, Research, University of Bath


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