The X Factor? Risk Management

THE ANALYSIS OF FINANCIAL STATEMENTS DURING THE PANDEMIC SHOWS THAT, IN TIMES OF CRISIS, SUBSTANCE IS MORE IMPORTANT THAN LIP SERVICE

In a technical sense, the economy identifies resilience in financial performance, or rather, the extra return a company obtains relative to a benchmark that is the average of the reference market. This is sufficient definition in normal times, but it does not address the issue of which factors actually determine differential performance during an epochal crisis. “In our research we have chosen to examine a large global sample of companies based on three characteristics: sustainability, transparency and risk management, to assess how much each of the three has affected their current performance,” explains Ariela Caglio, Associate Professor of Management Accounting and Director of the Bocconi-ESSEC Double Degree.
 
Already during the first wave of the pandemic, the group of researchers (which includes Gaia Melloni, Assistant Professor of Accounting and Janet Su, PhD candidate at the HEC University of Lausanne) began to assemble the dataset, by integrating the information collected by the Datamaran COVID-19 Tracker, which captures data on disclosures relating to COVID made by 1,000 firms, with the ESG performance in Refinitiv, and other, more traditional data on economic and financial variables. Thus the reference sample was created, a panel data set in which US companies, the most numerous, account for 57% of observations, and Italian ones 3%.
 
“What we see emerging from our early analysis is that, unfortunately, past social and environmental sustainability initiatives and performance have not been the effective vaccine which many claim,” remarks the Bocconi professor. “More decisive for the resilience of companies was their ability to manage risk, which is the phase that occurs after identification and evaluation of a major risk factor. Those who promptly implemented risk-mitigation actions made a positive impact in reference markets as early as the first phase of the pandemic.”
 
However, the research did not stop at this finding, but aimed at describing the consequences that occur in various company areas when burdened by systemic risk. “In Datamaran's COVID-19 Tracker there are 11 areas of investigation; we have observed that when risk seriously affected three of these, namely Business Disruption, Supply Chain and Human Capital, the full impact of the crisis was unavoidable. It is as if, despite any countermeasures implemented by companies and statements released in corporate disclosures, the market considers them as more vulnerable and therefore less reliable.” Another aspect of the research concerned the tone used in disclosures by companies. “There is an interesting negative relationship between the degree of resilience found and the optimism expressed in corporate statements", concludes Caglio. “In short, impression management no longer seems to work in times of crisis. Today, more than ever, substance and objectivity matter.”
 
Visit the COVID Crisis Lab website.

by Emanuele Elli
Translated by Alex Foti