Why Do Politicians Intervene in Accounting Regulation? The Role of Ideology and Special Interests

• Published date: 01 June 2020
• Author: JANNIS BISCHOF,CHRISTOPH J. SEXTROH,HOLGER DASKE
• DOI: http://doi.org/10.1111/1475-679X.12300
• Date: 01 June 2020

DOI: 10.1111/1475-679X.12300

Journal of Accounting Research

Vol. 58 No. 3 June 2020

Printed in U.S.A.

Why Do Politicians Intervene

in Accounting Regulation? The Role

of Ideology and Special Interests

JANNIS BISCHOF ,∗HOLGER DASKE ,∗

AND CHRISTOPH J. SEXTROH †

Received 21 May 2017; accepted 7 January 2020

ABSTRACT

Politicians frequently intervene in the regulation of financial accounting. Ev-

idence from the accounting literature shows that regulatory capture by spe-

cial interests helps explain these interventions. However, many accounting

rules have broad economic or social consequences, such as their effects on

∗University of Mannheim; †Tilburg University.

Accepted by Philip Berger. We would like to thank an anonymous referee, Hui Chen,

Atif Ellahie, Dave Farber, Joachim Gassen, Sean Gerrish, J¨

org-Markus Hitz, Sebastian Hoff-

mann, Stephan Hollander, Wenquian Hu, Anya Kleymenova, Christian Laux, Robin Lit-

jens, David Maber, Mihir Mehta, Greg Miller, Catherine Shakespeare, Laurence Van Lent,

Johannes Voget, and Steve Young, as well as seminar participants at the 2016 AAA An-

nual Congress in New York, the 2017 EAA Annual Congress in Valencia, the 2016 EASYS

Workshop in Maastricht, the 2016 Lisbon Accounting Conference, the 2016 VHB Congress

in Munich, the 2017 Meeting of the VfS Ausschuss Unternehmensrechnung in Konstanz,

Erasmus University Rotterdam, Frankfurt School of Finance & Management, IESE, Lan-

caster University, Maastricht University, Sungkyunkwan University, University of Bristol, Uni-

versity of Exeter, University of Michigan, University of Paderborn, University of Zurich,

Tilburg University, WHU Otto Beisheim School of Management, and WWU M¨

unster for

helpful comments and discussions. We also thank Kirstin Becker, Johanna Busch, Piet

Mahler, Daniel Schreiber, and Matthias Uckert for excellent research assistance. Christoph

Sextroh gratefully acknowledges research funding from the Fritz Thyssen Foundation.

Jannis Bischof and Holger Daske gratefully acknowledge funding from the German Re-

search Foundation (DFG) under the CRC TRR 266 program (“Accounting for Trans-

parency”), Project-ID 403041268. An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

589

C2020 The Authors. Journal of Accounting Research published by Wiley Periodicals, Inc. on behalf of The

Accounting Research Center at the University of Chicago Booth School of Business

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial

License, which permits use, distribution and reproduction in any medium, provided the original work is

properly cited and is not used for commercial purposes.

590 J.BISCHOF,H.DASKE,AND C.J.SEXTROH

income distribution or private sector subsidies. The perception of these con-

sequences varies with a politician’s ideology. Therefore, if accounting rules

produce those consequences, ideology plausibly spills over and explains a

politician’s stance on the technical accounting issue, beyond special inter-

est pressure. We use two prominent U.S. political debates about fair value

accounting and the expensing of employee stock options to disentangle the

role of ideology from special interest pressure. In both debates, ideology ex-

plains politicians’ involvement at exactly those points when the debate fo-

cuses on the economic consequences of accounting regulation (i.e., bank

bailouts and top management compensation). Once the debates focus on

more technical issues, connections to special interests remain the dominant

force.

JEL codes: G01; G28; K22; L51; M40; M41; M48; P16

Keywords: accounting regulation; fair value; financial crisis; ideology; polit-

ical economy; accounting standard setting; stock option expensing

“This is a public policy issue. This is not an accounting issue.”

Rep. David Dreier (R-Calif.), co-sponsor of a House bill on the

accounting for stock options (Spinner [2003]).

“From the outset of the hearing, it seemed clear to me this was not going to be a

neutral discussion of the issues.”

Robert H. Herz, former FASB Chairman, about the congressional hearing

on mark-to-market accounting in March 2009 (Herz [2013]).

1. Introduction

Although political forces arguably shape accounting standards (Zeff

[2005]), we know little about the motives behind politicians’ involvement

in the agenda setting or due process of standard setters (Gipper, Lom-

bardi, and Skinner [2013]). The accounting literature has predominantly

focused on the theory of regulatory capture, which explains politicians’

behavior as a response to special interest pressure from constituents and

donors (Stigler [1971], Peltzman [1976]). Evidence from accounting reg-

ulation is largely consistent with this view (Farber, Johnson, and Petroni

[2007], Ramanna [2008]). Political economy offers an additional expla-

nation, providing evidence that politicians’ ideologies can also influence

the political process (Kau and Rubin [1979], Kalt and Zupan [1984],

Poole and Rosenthal [1985, 1996], Levitt [1996], Mian, Sufi, and Trebbi

[2010]). So far, little evidence indicates what, if any, role political ideol-

ogy plays in the politics of accounting standard setting. The technical na-

ture of many financial accounting issues tends to mute ideological mo-

tivations: “Legislators and their staff typically know nothing, and could

not care less, about accounting standards” (Zeff [2010]). Put differently,

WHY DO POLITICIANS INTERVENE IN ACCOUNTING REGULATION?591

accounting rule-making is a “thin political market,” and the rules are gen-

erally determined by specialists (Ramanna [2015]), leaving little room for

ideology.1

However, many accounting rules have real economic or social conse-

quences. For example, bank accounting rules determine regulatory capi-

tal and thus affect the likelihood of regulatory interventions, such as the

use of taxpayers’ money for bank bailouts. Similarly, accounting rules for

stock option plans make different compensation schemes more or less at-

tractive and thus affect managerial compensation. Many of these economic

consequences are associated with ideological views (e.g., liberals prefer the

restriction of excessive top management compensation, while conservatives

oppose the spending of public resources on private sector bailouts). Ideo-

logical views on these economic consequences plausibly spill over to polit-

ical debates about accounting regulation, even if the accounting question

itself is not an obviously ideological one.

In this study, we investigate the public statements and sponsorship of

bills by U.S. legislators as a proxy for their involvement in two prominent

accounting debates. The first debate, concerning fair value accounting dur-

ing the 2008–2009 financial crisis, led to the relaxation of the FASB’s fair

value accounting rules in April 2009 (Herz [2013]). The change had direct

consequences for the regulatory capital adequacy of financial institutions

and thus affected the likelihood of bank bailouts and the transfer of tax-

payer resources to the financial industry. The second debate addresses the

expensing of stock options that firms grant to their employees and hap-

pened in 2003–2004, around the FASB’s adoption of SFAS 123. The ex-

pensing of employee stock options leads to the recognition of personnel

costs, potentially making stock option plans for top managers less attractive

for firms.

In both debates, the potential influence of special interest pressure

through political connections is evident. The relaxation of fair value write-

downs helps banks safeguard reported asset values against decreasing mar-

ket indicators and shield regulatory capital from corresponding declines

in equity. Other things being equal, violations of minimum capital require-

ments become less likely, as do costly interventions by prudential super-

visors, resulting in net benefits for bank shareholders (e.g., Bhat, Frankel,

and Martin [2011]). Similarly, any restriction on the expensing of employee

stock options helps avoid substantial reductions in the accounting earn-

ings of firms with extensive stock option plans, especially in the high-tech

1In this paper and in line with political science (e.g., Poole and Rosenthal [2011] and Mc-

Carty, Poole and Rosenthal [2013]), we use the term ideology to refer to a politician’sprefer-

ence regarding the role of government in the market. Even though this preference is located

on a continuum, we distinguish between a conservative (anti-government intervention) and a

liberal (pro-government intervention) ideology.