Annual report readability and financial reporting quality: the moderating role of information asymmetry

• Date: 31 December 2024
• Pages: 241-261
• DOI: https://doi.org/10.1108/IJAIM-06-2024-0192
• Published date: 31 December 2024
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Nguyen Thanh Dong,Cao Thi Mien Thuy,Nguyen Vinh Khuong,Anh Huu Tuan Le

Annual report readability and f‌inancial

reporting quality: the moderating role

of information asymmetry

Nguyen Thanh Dong,Cao Thi Mien Thuy and Nguyen Vinh Khuong

University of Economics and Law, Ho Chi Minh City,Vietnam and

Vietnam National University,Ho Chi Minh City, Vietnam, and

Anh Huu Tuan Le

School of Accounting, Information Systems and Supply Chain, RMIT University,

Melbourne, Australia

Abstract

Purpose –Drawing from agency and comprehensiontheories, this paper aims to examine the inf‌luence of

annual report readability (ARR) on f‌inancial reporting quality (FRQ), with a focus on how information

asymmetrymoderates this relationship.

Design/methodology/approach –The study uses a sample of 467 listed f‌irms in Vietnam from 2015 to

2021. To analyze the relationship between ARR and FRQ, this paper employs a Generalized Method of

Moments (GMM)regression, incorporating information asymmetryas a moderatingfactor.

Findings –The research f‌indings show that ARR has a positive and signif‌icant impact on the FRQ of

Vietnamese-listed f‌irms. This paper also f‌inds that information asymmetry signif‌icantly and partially

moderates the relationship between ARR and FRQ. Specif‌ically, ARR can help alleviate the level of

informationasymmetry and contributes to improved FRQ.

Practical implications –From a practical perspective, this paper provides empirical evidence for

managers, investors and related government departments to evaluate the effects of ARR and offers

regulators a method to help improve the transparency of the stock market. More importantly, the

results of this study have reference value for scholars and practitioners in developing countries like

Vietn am.

Originality/value –From a theoretical perspective, our study adds to the growing literature on ARR,

expands the scopeof ARR research, elaborates on relevant economic consequencesof ARR and complements

the literatureon the determinants of FRQ.

Keywords Annual report readability, Information asymmetry,Financial reporting quality,

Moderating effect

Paper type Research paper

JEL classif‌ication –G32, M40, M41

Funding: This research is funded by Vietnam National University Ho Chi Minh City (VNU-HCM)

under Grant number B2024-34-01.

Data availability statement: Data of present study will be available on request from corresponding

author.

Conf‌lict of interest disclosure: The authors declare no conf‌lict of interest.

Ethics approval statement: The author adheres to the ethical guidelines required by journal.

International

Journal of

Accounting &

Information

Management

241

Received15 June 2024

Revised26 O ctober2024

Accepted9December2024

InternationalJournal of

Accounting& Information

Management

Vol.33 No. 1, 2025

pp. 241-261

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-06-2024-0192

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

1. Introduction

Annual reports or f‌inancialstatements of companies are off‌icial and essential communication

tools for investors, regulators and other corporations (Bushman and Indjejikian, 1993;

Holmström and Tirole,1993;Kanodia and Lee, 1998). In other words, annual reports are one

of the main channels throughwhich companies communicate with external stakeholders, and

annual report readability (ARR) is a crucial feature (Yin et al., 2024;Du et al.,2024).

Readability refers to the coherence of a narrativeor text that determines how easily a reader

can understand it (Dalwai et al., 2021). Therefore, when management presents readable

information, it can be more appealing to analysts, reducing the time they need to spend

analyzing the information and making their forecastseasier. Several studies have found that

ARR can inf‌luence the quality of the resulting information. For example, poor ARR may

lead to signif‌icant earnings management issues, low earnings persistence, poor analyst

forecast quality, weak market reactions to annual reports and a high risk of stock price

crashes (Lang and Stice-Lawrence,2015;Kim et al., 2017). However, most of these studies

are limited to the research context of the U.S. or other developedcountries. In addition, few

studies examine the economic consequences of ARR in China, which is one of the biggest

economies worldwide [1]. Taken together, the relationship between ARR and f‌inancial

reporting quality (FRQ) in the research context of developing countries is still an empirical

question. In other words, while ARR has been extensively studied in developed countries,

the context of emerging economies,particularly Vietnam, remains underexplored. Vietnam’s

stock market is relatively young, and its regulatory environment is evolving, marked by less

stringent investor protection mechanisms and higher levels of information asymmetry

compared to mature markets. This unique contextprovides an opportunity to investigate the

impact of ARR on FRQ within an emerging economy, where transparency challenges are

often more pronounced.

The Vietnamese market presents distinct characteristics that set it apart from developed

economies. First, Vietnam has a signif‌icant proportion of state-owned enterprises, which

often exhibit less rigorous corporate governance practices than private entities. These

governance differences, combined with the evolving regulatory landscape, contribute to a

higher potential for information asymmetry, particularly among minority shareholders.

Furthermore, as a socialist-oriented economy with a smaller market size, Vietnam’s capital

market is characterized by limited transparency, creating opportunities for managerial

opportunism and increased informationopacity. Consequently, ARR may play a crucial role

in mitigating these transparency issues, making it a relevant topic of inquiry in the

Vietnamesecontext.

On the one hand, f‌inancial reporting contributes to mitigating information asymmetry

between f‌irms and investors, as well as among investors. Problems including agent issues,

earnings management, accounting fraud and budgetary slack can result from information

asymmetry (Wijaya and Herwiyanti, 2023). In many business scenarios, asymmetric

information arises when one party possessescrucial information that the other does not. This

imbalance can lead to challenges such as dishonesty risk, adverse selection and costly

verif‌ication processes within f‌inancial markets (Hallunovi, 2020). Moreover, a substitution

association between f‌inancial reporting and CSR disclosure in reducing information

asymmetry is indicated by the lower degree of information asymmetry among companies

with higher FRQ (Viviani et al., 2022). On the other hand, prior research indicates that if a

f‌irm writes a less readable annual report, it increases information opacity and makes it

considerably easier for managersto exploit resources in a self-serving manner (Biddle et al.,

2009). Consistent with opportunistic motive of managers, Rahman and Oliver (2021) show

that managers strategically increase information uncertainty around opportunistic insider

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