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Tax-Related Political Costs and Incentives to Voluntarily Adopt Fair Value Reporting
Jane Mooney, Simmons College
Kathleen M Weiden, Fairfield University
ABSTRACT. Prior to 2002, only two firms voluntarily expensed stock options under the provisions of FASB 123. By the end of 2003, a number of firms volunteered to expense stock options in the face of possible mandates from the FASB. We suggest that threatened tax increases for both firms and managers influenced the decision to voluntarily begin expensing options. Ex ante, we expect that the decision to begin expensing options reflects firms’ and managers’ beliefs that the voluntary expensing of stock options would ward off regulators’ efforts to enact proposed tax regulations affecting the firm’s and the manager’s taxes. We find evidence consistent with firms and managers using accounting policy choice to ward off threatened tax legislation. While prior research on the impact of taxes on accounting policy choice has examined accounting policy choice in response to enacted tax legislation, this paper provides evidence on accounting policy choice in the face of proposed tax legislation.
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