Congressional Intervention in the Standard Setting Process: An Analysis of the Stock Option Accounting Reform Act of 2004

Abstract

We examine H.R. 3574, the Stock Option Accounting Reform Act of 2004 (the Act), which sought to prevent the Financial Accounting Standards Board (FASB) from requiring the expensing of employee stock options at fair value. We find that employee stock option expense under the Act would be approximately two percent of what it would be under the FASB's preferred method. We also find that House members supporting the Act were more likely to be Republican, to be conservative, and to have received larger PAC contributions. Finally, the larger the impact of H.R. 3574 on the amount of stock option expense reported by the firm for employees who are not top five executives, the more contributions the firm's PAC made to House members and to members of the Committee that approved the Act. These results suggest that corporate opposition to the mandatory expensing of stock options at fair value is not driven solely by concerns of top five executives about the cost of recognizing their own options.

Keywords: PAC, H.R. 3574, employee stock options, standard setting, lobbying

JEL Classification: K20, M41, M44, G38