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

61 Pages Posted: 17 Feb 2011

See all articles by Asma Bouchekoua

Asma Bouchekoua

Higher Institute of Commerce and Business Administration

Hamadi Matoussi

University of Manouba - Gestion

Samir Trabelsi

Brock University - Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: November 30, 2010

Abstract

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.

Keywords: Sarbanes-Oxley, Bank, Loan loss provision, Market valuation

JEL Classification: G14, G21, G38, K22, M41

Suggested Citation

Bouchekoua, Asma and Matoussi, Hamadi and Trabelsi, Samir, Monolithic Versus Differential Impacts of SOX Regulation on Market Valuation of Banks’ Loan Loss Provision (November 30, 2010). Available at SSRN: https://ssrn.com/abstract=1762810 or http://dx.doi.org/10.2139/ssrn.1762810

Asma Bouchekoua

Higher Institute of Commerce and Business Administration ( email )

la Manouba, 2010
Morocco

Hamadi Matoussi

University of Manouba - Gestion ( email )

Campus Universitaire de la Manouba
Manouba 2010, 2010
Tunisia
216-71-600 705 (Phone)
216-71-602 404 (Fax)

Samir Trabelsi (Contact Author)

Brock University - Accounting ( email )

St. Catharines, Ontario L2S 3A1
Canada

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