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

The Benefits of Disclosing Internal Control Weaknesses: Evidence from Taiwanese Banks 184 The dependent variable, ICW , is equal to 1 when bank i discloses a non-zero value of ICWs in year t , and 0 otherwise. The construction of Model (1) mainly follows Doyle et al. (2007). First, SIZE equals the log of a bank’s total assets (in millions) (Chen and Lin, 2010). Larger banks tend to have more employees and therefore are able to have more effectiveness in implementing internal control mechanisms. However, they may engage in more transactions with complex operations, which would increase the possibility of them reporting more ICWs than smaller banks would report. Second, this study includes the age of the bank ( ln ( AGE )). Older banks are likely to have fewer ICWs because they have established adequate control systems. Three variables are used to control the financial health of banks. Fewer ICWs are expected for banks with stronger financial resources (Doyle et al., 2007). AGGLOSS captures the operation loss in two consecutive years. Furthermore, ROA and the standard deviation of ROA , denoted as sd ( ROA ), is used to account for the bankruptcy probability (De Nicolo, 2001; Iannotta, Nocera, and Sironi, 2007; Lin, Chang, and Wu, 2014; Tsai, Chang, and Lai, 2009). Higher ROA with lower sd ( ROA ) indicates a lower possibility for a bank to enter bankruptcy. Three other variables, DIV_ASSET , DIV_REV , and FOREIGN , are used to control the complexity of the operating environment of the bank. When banks engage in more complex operating transactions, they are more likely to have more ICWs (Doyle et al., 2007). Following Laeven and Levine (2007), Lin et al. (2014) and Tsai et al. (2009), total profit-generating assets are separated into loans and other profit-generating assets, and then the degree of diversification according to their assets is calculated. EXGROWTH controls for the effect of the rapid growth of a bank. A bank with rapid growth may require more time to establish adequate internal control procedures than a bank with stable growth would, and hence it may report more ICWs (Doyle et al., 2007). The detailed variable definitions are presented in the Appendix. Corporate governance is also expected to be associated with internal control quality (Doyle et al., 2007). This study includes nine corporate governance variables in Model (1). Some previous studies document that smaller boards are related to sounder governance (e.g., Yermack, 1996; Core, Holthausen, and Larcker, 1999), whereas other studies find that board size correlates positively with firm performance (e.g., Dalton, Daily, Johnson, and Ellstrand, 1999). Therefore, this study does not hypothesize what the sign of the coefficient of BDSIZE will be. Another characteristic of the board is the independence of the board members. Firms that have boards with more outside directors than inside