Political Costs and the Fate of the FASB Proposal to Recognize the Costs of Employee Stock Options

Abstract

Seven key announcements made during the prolonged debate on the Financial Accounting Standards Board's (FASB) proposal to recognize the effect of all stock-based compensation on earnings are studied. Using several samples of firms involved in the debate, evidence that investors expected no net benefit from the proposed disclosure standards is provided. In fact, the results are consistent with the hypothesis that the proposal posed significant political costs for option-compensated CEOs that were likely to be passed on to shareholders. For some samples, the average share price declines on announcement of the proposal and offsetting average increases on news that the FASB would drop the proposal.

Keywords: taxation, employee stock options

JEL Classification: G38, M41