Corporate governance reform has become a global issue over the last decade. The Asian crisis in 1997 and corporate scandals such as Barings, WorldCom and Enron have highlighted the need for corporate governance reform at a global level (Demirag and Solomon, 2003). The passage of the Sarbanes Oxley Act of 2002 (SOX) was to respond to the accounting scandals mentioned above and several other large corporations. This regulation imposes a number of corporate governance guidelines on all publicly traded companies in the U.S. Specifically, it requires that the board be composed of the majority of independent directors and in addition, the audit committee consists entirely of independent directors in which at least one financial expert is included in the audit committee.

Additionally, the new regulations also impose restrictions on the types of services that outside auditors can provide to their audit clients to assure the independence of the auditors opinion, thereby enhancing the audit quality. By requiring more oversight and imposing more restrictions on the composition of board structure, the SOX Act aims to prevent deceptive accounting and management misbehavior. Despite the claimed benefits of this Act, the passage of SOX gives rise to a broader concern that SOX could signal a shift to a more rigid federal and state regulation of corporations, thereby causing that the direct and indirect costs of SOX can outweigh its benefits. For instance, a 2004 Price water house Cooper’s survey of CEOs finds that 59% of the respondents view the risk of over regulation as one of the biggest threats to the growth of firms (Norris, 2004). As a result, whether the enactment of the SOX Act can improve firm performance becomes an empirical question.

Insurance industry has long been recognized as a highly-regulated industry on a state level. With such character, insurance industry serves as a good research sample to examine whether imposing additional regulations on corporate governance as guided in the SOX Act can enhance the efficiency performance for this already highly-regulated industry. Specifically, this paper intends to investigate whether the promulgation of the Sarbanes-Oxley Act provides additional motivation for insurers to address the corporate governance issues and how their compliance with SOX can be reflected in their efficiency performance.

There is a long and developed research that has focused on examining the relationship between corporate governance and firm performance (Core et al., 1999; Estrin and Rosevear, 1999; Weir and Laing, 2001; Davis, 2002; Evans et al., 2002; Judge et al., 2003; Akimova and Schwodiauer, 2004). While public and academic interests have been directed at non-financial service industry, little attention has been paid to the insurance industry. Nevertheless, Diacon and O’Sullivan (1995) and O’Sullivan and Diacon (2003) pioneer a stream of research with the focus on the relationship between corporate governance and firm performance in the UK insurance industry. The extant literature studying on how corporate governance contributes to firm performance commonly use return on equity (ROE) and Tobin’s Q as the profitability and performance measures.

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