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

57 Pages Posted: 23 Jan 2012

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

Date Written: January 16, 2012

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. 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.

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 the Market Valuation of Banks’ Loan Loss Provision (January 16, 2012). CAAA Annual Conference 2012. Available at SSRN: https://ssrn.com/abstract=1985950 or http://dx.doi.org/10.2139/ssrn.1985950

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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