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

The Benefits of Disclosing Internal Control Weaknesses: Evidence from Taiwanese Banks 182 filers. Therefore, ICW disclosure is less likely to provide incremental information for accelerated filers, who operate in richer information environments. Similarly, Li et al. (2016) indicate that the negative effect associated with ICWs is reflected in equity value prior to the time of disclosure. The present study focuses on the effect of ICW disclosures on firm values rather than the cost of capital because the market value of equity is generally considered to incorporate all relevant information (Aaker and Jacobson, 1994; Barth, Beaver, and Landsman, 2001; Paul, 1993). Based on forecast, this study does not expect results to be similar to those reported in previous studies for the following reasons. First, the data Beneish et al. (2008) use are only obtained from firms that disclose at least one ICW; however, the data from this study include both firms with zero and non-zero ICWs. It is reasonable to suggest that investors view the difference between zero and non-zero ICWs to be more salient than the difference between two non-zero ICWs. Second, in studies investigating highly efficient markets, such as the U.S. capital market (Beneish et al., 2008; Li et al., 2016), the information in ICW disclosures is more likely to be revealed in advance through other channels; in contrast, ICW disclosures may still be relevant in a less mature market like Taiwan’s stock exchanges. Moreover, the most innovative aspect of this study is the proposal that ICW disclosures may reveal the degree in which firms take the process of identifying ICWs seriously. Since it is not reasonable to assume that a bank would actually have no ICW, 4 a bank reporting zero ICW is more likely to have exerted little effort in identifying ICWs. In contrast, reporting non-zero ICWs indicates that the bank has some operation deficiencies, and yet suggests that the bank takes the process seriously, i.e., its effort level is higher. Previous studies indicate that greater management effort is related to improved firm performance (Bonner and Sprinkle, 2002; Bitler, Moskowitz, and Vissing-Jørgensen, 2005), and therefore, when a bank reports the presence of ICWs, investors may perceive the following: (i) the bank has some deficiencies in operations, and (ii) the bank makes substantial efforts in identifying and reporting ICWs. The former would negatively affect how investors value the bank, but the latter would positively affect the bank’s value. The 4 The regulator in Taiwan announces bank violations of regulations/laws annually. One particular regulation pertains to the design or implementation of internal control systems. According to Chiang et al. (2015), from 2005 to 2011, 38 of 62 violations were related to ICWs. The ratio is relatively high and also suggests that it is highly unlikely that a bank would actually have no ICWs.