Cameron Truong at Monash University reflects on his co-authored article, “Winning the Australasian Reporting Awards: An Analysis of Economic Outcomes,” published in the Australian Journal of Management. The other authors were Christofer Adrian, Ka Wai (Stanley) Choi, and Mukesh Garg.
This study focuses its empirical examination on the Australasian Reporting Awards (ARA), which are conferred for excellence in annual reporting benchmarked against the world’s best practices. The ARA association assesses firms’ financial statements on an annual basis, and a panel of independent judges decide ARA winners based on a metric of ad-hoc reporting quality evaluation.
In this study, we investigate whether the ARA assessment criteria reliably reflect the observable quality of financial reporting. We also ask the question of whether winning the ARA reflects firm performance or contains information that is not yet incorporated in the security prices of the winners. Our main findings suggest that judges of the ARA might not decide winners based on earnings quality, financial performance, or market-based perceptions, but possibly based on other aspects of the firms that are not directly related to academic metrics of financial reporting quality or financial performance. Employing textual analysis, we, however, find that award-winning firms exhibit higher readability in their annual reports.
We also find that ARA winners exhibit good corporate governance practices. Next, our event study analysis shows no clear market response to award announcements of the ARA winners, which suggests that the capital market does not perceive the announcements of the ARA favorably. Last, we document inferior future stock return performance for a portfolio formed based on award-winning firms. Collectively, users of the ARA outcomes should also be cautious with the immediate interpretation of the ARA as signals of superior corporate performance.
One of the primary contributions of our exploratory study is that we raise the question of whether the criteria used in the ARA’s assessment of reporting quality are consistent with the common measures of reporting quality employed in academic research. In this space, our findings show that they are largely inconsistent.
This contribution is relevant to accounting practices in light of the remark made by professor Shiva Rajgopal of the Columbia Business School, who has earnestly called for better integration between accounting research and practice in the recent 65th anniversary conference of Management Science. Particularly, he urges accounting researchers to apply rigorous academic methods to solve and understand problems relevant to policy and practice. Our study points out that it is still unclear what constitutes ‘good reporting quality.’ However, it must be recognized that this is only the first study in what is an important area for financial reporting quality and the Australian capital market.
We encourage future research to explore and contribute to the development of alternative reporting quality measures and, in particular, in the attributes of financial reporting quality identified as being value-relevant to investors.