Monolithic Versus Differential Impacts of SOX Regulation on Market Valuation of Banks’ Loan Loss Provision

This study examines the incremental impact of the Sarbanes-Oxley Act (SOX) on the market valuation of the discretionary component of banks' provision for loan losses. The SOX provides an interesting context for testing the efficacy of corporate governance provisions developed in the professional and governmental fields. We find that prior to SOX, the market assigned a higher valuation of discretionary loan loss provisions when the board was independent and a lower valuation of discretionary loan loss provisions when the governance committee and the compensation committee were fully independent. In contrast, post-SOX, we document a significant negative incremental effect on the market valuation for a board with more independent directors. These findings are consistent with economic regulation theory. The market assigned a higher valuation of discretionary loan loss provisions when the compensation committee were fully independent. We contribute to prior literature on corporate governance by unpacking specific effects of the different proposed governance provisions, thereby revealing that the developed notions of corporate governance have not led to a monolithic governance-enhancing structure but to disparate parts, some of which may be detrimental