臺大管理論叢 NTU Management Review VOL.30 NO.2

179 NTU Management Review Vol. 30 No. 2 Aug. 2020 capital or the quality of financial reporting are insightful, the value effect has a more direct effect on the disclosure policy of management. Because diligently providing disclosures usually incurs considerable costs, management is strongly discouraged from doing so if the market does not consider such disclosures to be relevant. Second, this study is the first to argue and show that ICW disclosures reveal the efforts of firms in assessing their internal control effectiveness and are therefore positively related to the market value of equity. The evidence clearly informs managers that the market appreciates the diligent reporting of ICWs and holds an unfavorable view when no ICWs are identified during an assessment. Third, the evidence supports the regulator’s requirement that firms should regularly identify and report ICWs because such disclosures are relevant to investors owing to their clarifying the firms’ engagement in improving their performance through internal control systems. The remainder of this paper proceeds as follows. Section 2 introduces the institutional backgrounds and literature and develops the hypotheses. In Section 3, the research design is explained. Section 4 describes the samples and presents the empirical results. Finally, the conclusions of this study are drawn in Section 5. 2. Institutional Backgrounds, Literature, and Hypothesis Development Senior executives have long sought methods for increasing the efficiency of controlling the enterprises they run. Internal controls are implemented to promote efficiency, reduce the risk of asset loss, and assist in ensuring the reliability of financial statements and compliance with laws and regulations (COSO, 1992). Numerous corporate scandals in the United States around the turn of the twenty-first century (e.g., Enron, WorldCom, and Tyco) have raised concerns in regards to the quality of financial reporting. Hence, Section 404 of the Sarbanes-Oxley Act (SOX; the section is usually referred to as SOX 404) requires management to annually evaluate internal controls for financial reporting and disclose material weaknesses (usually referred to as ICWs). In Taiwan, the regulators have required banks to regularly provide ICW disclosures in their annual reports since 2001, in accordance with the “Implementation Rules for Bank Internal Audit and Internal Control System” and “Implementation Rules of Internal Audit and Internal