Pandemic and the economy: zombie companies as a result of the crisis, the potential of tax loss compensation, and the bright and dark side of transparency regulations within our tax system. A conversation with Paderborn economist Caren Sureth-Sloane, a member of the DFG’s Pandemic Commission.

Interview: Dr. Rembert Unterstell, german research.

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german research: Professor Sureth­-Sloane, a three­-year pandemic also means that large and small companies in Germany have experienced three years of crisis. What is the current state of the economy?

Caren Sureth-Sloane: The economy in Germany is doing reasonably well after these years of crisis. Overall, we observe a positive trend after and despite the crisis, although firms are still exposed to uncertainties. The German economy turned out to be quite resilient. As of today, the economy has recovered to a considerable extent. This development might also indicate that government support measures, on average, effectively helped companies. However, this does not apply to every individual case.

The pandemic’s impact on the economic system has been as diverse as it was dra­matic – which sectors of the economy have suffered the most?

We know so-called coronavirus cri-sis industries, which include hospitality, catering, artistic activities, film distribution, and specific services in the private sector, such as hairdressers or beauty salons. They were all massively affected within a short period. Many of these sectors have recovered, and even catering is gradually emerging from its nadir. Other sectors, including cinemas and film distribution, are still struggling. Albeit, this is also due to changes in media behaviour.

There was much talk in the media of waves of bankruptcies. Yet the results of the “Accounting for Transparency” Collaborative Research Centre (CRC/TRR 266), whose spokesperson you are, report that a nationwide wave of bank­ruptcy has not occurred, even mention­ing an “insolvency paradox”.

The phenomenon described as an “insolvency paradox” results from suspending the obligation to file for insolvency during the pandemic. This was intended to support companies in financial distress due to the pandemic, even if the formal legal conditions for opening insolvency proceedings were met, for example, due to the strained liquidity situation. But what we now observe was unintended: not only were fundamentally healthy companies supported, but also many distressed and over-indebted companies, which had been in trouble already before the pandemic. The consequence: insolvency filings that would have been appropriate were not filed. The result: fewer insolvency filings despite challenging economic conditions. Recently, we have observed that the number of insolvency cases is increasing. Whether this implies that the so-called zombie companies, artificially kept afloat, are now insolvent remains to be seen.

What is the data basis for such findings?

One of our CRC’s projects system-atically records the insolvency notices issued and published by German bankruptcy courts into our “insol” database. This ensures they are available for different purposes, including research. We can exploit these data to identify patterns and enable further analysis. This is important since insolvency proceedings are a fundamental mechanism of the economic system. The removal of non-functioning companies provides room for innovations. We also use the German Business Panel to assess default probabilities. Analysing both the development and expectations of insolvencies is crucial for economic policy decisions.

Let’s look at the research policy decisions and the advisory expertise of researchers from business administration: as early as spring 2020, your CRC submitted a dossier pointedly titled “Research In­sights – Addressing the economic chal­lenges caused by COVID­19”. What was its purpose?

We’re a group of researchers who study the transparency of firms from the perspectives of financial and non-financial reporting of companies, managerial accounting, and taxation. We also study regulatory transparency. With our research, we can contribute to pressing issues at various levels. The dossier was therefore published to provide analyses and diagnoses that can help develop effective regulation, thereby contributing to the solution of pressing problems. At that time, for example, we launched a call for specific reforms in the tax law based on theoretical considerations and empirical evidence. We called for extending the possibilities to offset losses for tax purposes, especially the so-called loss carryback, in order to reduce the discrimination against loss-making companies in the tax system.

What was the point of this tax loss carry­back in the crisis?

An enhanced tax loss carryback allows companies with crisis-related losses to offset these losses against the taxed profits of previous years. This induces an immediate tax refund that provides liquidity to the companies. The crucial feature of an enhanced tax loss carryback is that it quickly provides additional liquidity through refunding overpaid taxes and is thus a powerful tool during a crisis. An enhanced tax loss carryback is also beneficial for the government because it is cheap. It only speeds up the repayments that would largely accrue in the medium term anyway.

Has the tax loss carryback convinced economic and financial policymakers?

The proposal, which we were able to put forward before the first lockdown and which has also been put forward by other institutions, has been taken up by policymakers quickly. The enhanced tax loss carryback was implemented along the lines suggested. Early in the pandemic, in the summer of 2020, the possibility of loss carryback was expanded, then prolonged in March 2021 and further expanded. This is a positive example of a very valuable and constructive exchange between research, business, and politics.

How can the liquidity support be as­sessed from today’s perspective?

So far, we’re only able to observe the short-term effects. We still have to examine the long-term effects of the liquidity support programme. However, studies of other countries during various prior crises help us understand the impact of specific measures in a crisis. These studies suggest that, for example, invest-ment incentives are particularly crucial in times of crisis but only successfully incentivize if, at the same time, trust in government is strong and application and filing procedures are transparent and easy to handle. In our cross-country studies, we see that high compliance costs and impaired trust in governments considerably attenuate the effectiveness of investment incentives and put avoidable additional burdens on businesses and public administrations.

“Transparency” is an important refer­ence point in your research, not only with respect to pandemic issues. How can the tension between the opportuni­ties and limitations of transparency reg­ulation in the tax system be described?

There are many calls for more transparency. Often transparency entails providing more information and, thus, more documentation. In that case, we need to figure out: what is the quality of this information, who can actually absorb and understand it, and how much does its provision cost? Greater transparency can have an enlightening effect but can also result in misunderstandings. The apodictic demand for greater trans-parency can paralyse entire organisations or violate incentives to behave in the socially desired manner. Therefore, the costs and benefits of transparency must be carefully assessed on a scientifically sound basis.

Here and in general, you choose inter­national comparison for your studies. Why is this the case?

International comparison is an important instrument for research. We deal with phenomena that arise and rules that are implemented in a global economic environment. In fact, however, the economy responds to national and supranational developments and regulations – by the OECD, the EU, and countries with different legal systems, political environments, and accounting systems. Given such diversity, regulations are always context-specific and not tailored to every country and every person or entity. We collect and analyse this regulatory and environmental diversity and exploit it to learn which instruments – in-cluding investment incentives – best contribute to achieving the politically set aims of regulation and under which conditions.

Back to the pandemic and the pandemic measures: what do you see as the most urgent research need from a business administration perspective?

It is vital to evaluate the pandemic measures and to look deep into the companies and their processes to better understand which conditions and measures are conducive or inhibiting for which types of companies and which stakeholders – managers, employees, customers, suppliers, etc. Who benefits, who suffers – and under what conditions? Which measures were costly but achieved little? Which measures are sufficiently flexible to function well in a rapidly changing environment? A thorough theory- and evidence-based analysis is crucial to enhance the toolbox further and make it even more helpful in the next crisis.

The next pandemic is always just around the corner. What can the “eco­nomic view” contribute to our much­discussed preparedness?

It is essential to understand that there are no simple answers. Economic expertise is required to understand the processes within companies and the interactions between companies, public administrations, and all other stakeholders. Sound knowledge of institutional details is required – concerning the law, soft law, and other regulatory aspects. It’s equally important to collect granular data about companies and the perceptions of decision-makers within companies. Coordinated research programmes such as our CRC can significantly contribute to coping with these mammoth tasks. They offer unique opportunities to collect data and make existing data usable and understandable in exchange with business and public administration. In the future, we should make even more targeted use of business administration skills and also collaborate with other disciplines to fuel evidence-based crisis analysis and management.

Resilience is now a big issue throughout the economy, governments, and society. What factors can contribute to long­term resilience in the tax system?

Let me use the example of the tax loss carryback: this is an instrument that provides room to breathe in crises and protects healthy companies – in other words, those that are doing well but face crisis-induced liquidity challenges from interrupted business models and decreases in sales and services – and that does not generate zombie companies. Further, we’re constantly confronted with the fact that many tax reforms are negotiated at the supranational level and, thus, not solely in the hands of a national legislator. So, it is important to identify those areas that national regulators can shape. Our studies also reveal how burdensome many national structures and tax procedures are for companies, especially for companies affected by the crisis. Reducing the inherent compliance costs is a vital starting point for targeted relief, strengthening resilience, and increasing trust in the government. In-depth analysis and identification of suitable measures can substantially help achieve greater resilience.

Thank you very much for talking to us.

Further Information

The interview was published in the 

• DFG magazine "forschung" (1/2023, page 6 - 9).

English version of the interview is available in the 

• German Research (1/2023, page 8 - 11).