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

201 NTU Management Review Vol. 30 No. 2 Aug. 2020 Then, two new variables are created on the basis of the sign of the residuals. ICW_PR = residual if the residual from model (1) is positive; 0 otherwise. ICW_NR = residual if the residual from model (1) is negative; 0 otherwise. Finally, the market value of equity is explained by the two new variables, ICW_PR and ICW_NR , book value of equity, net income, and other control variables. The untabulated result still indicates a positive coefficient for ICW_PR (coefficient 0.005 with p = 0.005) while the coefficient of ICW_ NR is negative (coefficient - 0.022 with p = 0.113), indicating that banks reporting ICWs than the benchmark ( ICW_PR ) have higher market values. 5. Conclusion An organization’s internal control system is designed to provide reasonable assurance regarding the achievement of operational effectiveness and efficiency, reliability in financial reporting, and compliance with applicable laws and regulations. To ensure that an internal control system is well-functioning, firms in many developed countries are required by their regulators to assess their internal control effectiveness and to disclose any deficiencies or weaknesses discovered in the assessment. The present study focuses on the value effect of disclosing ICWs by using data on listed banks in Taiwan for the 2001–2014 period. This investigation is critical because if the ICW disclosures are not valued by the market, then management incentive to report ICWs would be low and firm compliance with the regulator requirements regarding ICW disclosures might not be thorough. Empirically, the potential endogeneity problem related to reporting ICWs is first addressed by using Heckman’s two-stage method. Subsequently, the Ohlson model is applied to examine the value effect of reporting non-zero ICWs. The empirical results indicate that reporting non-zero ICWs is positively valued by the market, which is consistent with the hypothesis; this reveals that the effort of firms in assessing their internal control effectiveness is appreciated by the market. Collectively, the findings contribute to the field by showing support for regulator’s disclosure requirements and encouraging managers to diligently report ICWs. This study has the following limitations. First, the observations are from the banking industry and the generalizability of the findings to other industries requires examination. Future research may consider extending the research scope to companies in other industries to examine the value effect of ICW. Second, not all ICW disclosures imply the same severity of weakness. Prior studies document different effects of account- and