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