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 Table of Contents

Table of Contents ................................................................................. 1

List of Tables ........................................................................................ 3

Introduction........................................................................................... 5

Chapter 1 Tax Aggressiveness: Concepts and Theory ................... 11

I. Tax Aggressiveness: Lighting and Distinctions ........................... 12

A. Concept of tax aggressiveness ............................................................. 12

B. Underlying Tax Policy Concepts ........................................................... 18
II. Theoretical Underpinnings............................................................. 24

A. Agency Theory ..................................................................................... 24

B. Legitimacy and Stakeholder Theories ................................................... 27
C. Upper Echelons Theory ........................................................................ 30
Conclusion .......................................................................................... 34

Chapter 2 Literature Review and Hypotheses Development ........... 36

I. Board Structure and Composition ................................................. 38

A. Board Size ............................................................................................ 40

B. Board Independence ............................................................................ 45
C. CEO Duality ......................................................................................... 49
,,([HFXWLYHV¶&KDUDFWHULVWLFVDQG7D[$JJUHVVLYHQHVV ................. 52

A. CEO Attributes...................................................................................... 52
1. CEO Age ............................................................................................ 53
2. CEO Tenure ....................................................................................... 54
B. Managerial Compensation .................................................................... 55
III. Audit Fees ...................................................................................... 59

Conclusion .......................................................................................... 60

Chapter 3 Methodological Procedures.............................................. 62

1

I. Data and Variables Construction .................................................... 63

A. Data Sources and Sample Selection Procedure ................................... 63

B. Variables Measurement, Descriptive Statistics and Correlation Analysis
................................................................................................................. 63
1. Variables Measurements .................................................................... 63
1.1. Dependent Variable ...................................................................... 64
1.2. Independents Variables ................................................................ 66
1.2.1. Corporate Governance Variables............................................ 66
&(2V¶Specific Variables ........................................................ 68
1.2.3. Audit Fees .............................................................................. 70
1.3. Control Variables .......................................................................... 71
1.3.1. Firm Size ................................................................................ 71
1.3.2. Profitability .............................................................................. 72
1.3.3. Capital Intensity ...................................................................... 73
1.3.4. Intangibles .............................................................................. 74
2. Descriptive and Correlation Analyses ................................................. 75
II. Methodology and Empirical Results ............................................. 82

A. Baseline Model Specification ................................................................ 82

B. Multivariate Analysis ............................................................................. 83
1. Tests on Panel Data ........................................................................... 84
1.1. Testing Individual Effects .............................................................. 84
+DXVPDQ¶V6SHFLILFDWLRQ7HVW ...................................................... 84
1.3. Diagnostic Checks ........................................................................ 86
2. Regression Results ............................................................................ 87
3. Additional Tests and Robustness Checks .......................................... 90
Conclusion .......................................................................................... 92

Conclusion and Recommendations .................................................. 93

References .......................................................................................... 97

2

 List of Tables


Table 1 Variables Definitions and Expected Signs ............................... 75

Table 2 Descriptive Statistics ............................................................... 76

Table 3 Correlation Matrix .................................................................... 81

Table 4 Regression Results ................................................................. 89

Table 5Robustness Tests .................................................................... 91

3

 4

 Introduction

I
n order to assess the performance of a company, one can utilize the
financial statement for a given accounting period as it is the main
FRPPXQLFDWRU RI WKH FRPSDQ\¶V SHUIRUPDQFH WR HYHU\ FRQFHUQHG
stakeholder. In this research, we stress two stakeholders that aim at
corporate financial statement, viz: management and government. In most
cases, management chooses to pay less tax since taxes paid typically
diminish corporate net income, which is generally perceived as the main
indicator of corporate performance. On the other hand, governments intend to
levy taxes as high as possible; since they are one of the major sources of a
VWDWH¶VSURFHHGV

Surveys and extant literature evidence that highly elaborate structures mainly
geared to alleviate the corporate tax burden are likely to drive market¶V
perception to believe that not only are the tax rules being circumvented but
also financial statements are being manipulated. In light of this, Hanlon and
Slemrod (2009) document that highly complicated tax arrangement schemes
can cause the market to fear the company is not only dodging tax legislation,
but also is stretching the rules on preparing financial statements.

For years, since the mushrooming of corporate financial and accounting

scandals, studies on tax aggressiveness have been the topic of many insights
of regulators and researchers. In this respect, the Canada Revenue Agency
(CRA) (2008) announced after surveys that a very significant number of
corporate taxes evades from the state by pursuing aggressive tax-planning
activities.

There is no generally accepted definition of tax aggressiveness. Its

deployment brings significant costs and benefits for management,
shareholders and the company. Holistically, one major and direct benefit is
tax savings, which typically increase cash flows, after-tax earnings and
shareholder wealth.

Management actions merely conceived to lower taxes following the

deployment of aggressive tax-planning activities are getting more and

5

ubiquitous in the corporate landscape, and especially pervasive in
multinationals and corporate America.

The divergence of interests among state and corporations is one of the widely
conflicting cases that occur in a corporation; in the context of agency conflicts
could be lessened by an accommodation of external and internal
VWDNHKROGHUV¶ LQWHUHVW PHFKDQLVP 7KLV PHFKDQLVP LV ZHOO NQRZQ DV
corporate governance. It is a mechanism used to scrutinize a corporation,
particularly its management team and hence it can efficiently reconcile both
divergent interests of external and internal stakeholders (i.e. government and
management).

Corporate governance could mitigate monitoring fees by ensuring a higher

level of scrutiny and transparency. A system affects how a company is
managed and controlled. Admittedly, corporations with strong corporate
governance will have greater performance than those with poor corporate
governance.

The corporate governance has to oversee different actors and employ

planning procedures. It also has to have an overall view of management
actions; nevertheless, the question of its effectiveness has been the subject
of plenty of controversies and discussions in both time and space, as a way
to reinstate the informational efficiency.

Until recently, there has been relatively little attention paid to the relationship
between corporate governance and taxes. However, the two disciplines
intercept in many angles. Recently, taxation has collided with corporate
governance on the grounds of raised concerns over the proliferation of
corporate tax aggressiveness and thus the greatest interest to become aware
of the mechanics and motivations for such transactions. Corporate
governance is the interplay of the governors in managing and controlling a
firm; while taxes influence firm financial decision making including determined
the organizational form, restructuring decisions, payout policy, compensation
policy and risk management decision. In connection with that, corporate
governance is viewed as a factor influencing tax aggressiveness since
PLQLPL]LQJ WD[ SD\PHQWV LQFUHDVH FRPSDQ\¶V FDVK IORZV DQG WKH JRYHUQRUV
play major role in allocating the fund and in decision making.

6

Since then, investigations on the corporate governance mechanisms and tax
issue occupied the stage center. A number of researchers (e.g. Desai and
Dharmapala, 2006; Hanlon and Slemrod, 2009; Chen et al., 2010; Lanis and
Richardson, 2011; Armstrong et al., 2015) have tried to discover by what
specific channels corporate governance reduces tax aggressiveness
activities, but they document contradictory results and find inclusive
inferences.

Thereon, we still miss a complete understanding as to which factors related to

corporate governance drive variation in tax aggressiveness across firms.
Then, it remains much less known about the role of corporate governance in
tax aggressiveness.

In this study, we chiefly consider the impact of corporate governance

structure that is board structure and composition, as well as CEO
compensation and audit fees on the level of corporate tax
aggressiveness.

In addition to corporate governance factors, individual top managers may also

play an important role in shaping the corporate tax aggressive behavior.
8SSHUHFKHORQVWKHRU\DUJXHVWKDW³WRSH[HFXWLYHVVXFKDV&(2VDQG&)2V
interpret their opportunities and threats and make their decisions on important
corporate policies through their own highO\SHUVRQDOL]HGOHQV´+DPEULFNDQG
Mason 1984).

Little research has studied whether and how the demographic characteristics
of individual CEOs affect the level of corporate tax aggressiveness (one
amongst studies is of Dyreng et al., 2010). For much of existing empirical
research, the human factors seem to be ignored in studying determinants of
corporate tax aggressiveness.

Based on the impact expected of top executives in the corporate

strategic decisions, we aim to explore the impact of some CEO
demographics, most notably age and tenure in tax aggressiveness.

Identifying which CEO characteristics being likely to influence corporate taxes

is important LQ RUGHU WR EHWWHU JUDVS WKH ODUJH KHWHURJHQHLW\ LQ ILUPV¶ WD[
aggressiveness.

7

Despite the considerable role played by the Chief Financial Officer (CFO) in
PDQDJLQJDQGRYHUVHHLQJWKHILUP¶VWD[IXQFWLRQZHUDWKHUIRFXVRQWKH&KLHI
Executive Officer (CEO) because he is the top decision-maker inside the firm
DQG KH KDV WKH XOWLPDWH VD\ DERXW KLV ILUP¶V ELJ strategic decisions and
decides whether to engage in tax aggressiveness.

Numerous academics and practitioners attempt to explain the rampant

increase in corporate tax misbehavior, though the interest was only brought to
the effects of firm-level characteristics (e.g. Gupta and Newberry, 1997). For
this, rather than focusing on a specific aspect, we blend the firm-level
FKDUDFWHULVWLFV FRUSRUDWH JRYHUQDQFH PHFKDQLVPV DQG &(2¶V VSHFLILF
attributes to study their impact on corporate level tax aggressiveness.

Thus far, the majority of research examining the link between corporate
governance, managerial compensation and corporate tax aggressiveness has
focused on corporate America and generally reveal that such firms with good
corporate governance are able to mitigate tax aggressiveness (e.g. Desai and
Dharmapala, 2006; Hanlon and Slemrod, 2009; Chen et al., 2010; Armstrong
et al., 2015).

This study contributes to existing literature by extending the scope of

previous studies on corporate governance and tax aggressiveness by
considering the impact of corporate governance structure, CEO
compensation, CEO attributes and audit fees on tax aggressiveness
within a French context.

The choice of the French context seems particularly interesting for two
reasons. First, governance mechanisms have significantly evolved in the past
few years in France and various corporate governance codes of best practice
have been drawn up by the French labor union, notably by the so-called
MEDEF (Mouvement des Entreprises de France) and AFEP (Association
Française des Entreprises Privées) under the names of the Viénot 1 & 2
reports and the Bouton report in an attempt to improve the quality of board
governance and ensure greater transparency in response to the expectations
of investors and the whole public. Indeed, the Viénot 1 report (1995) was
mainly concerned with the board of directors of publicly listed companies. It
endorsed, inter alia, the creation of board committees, a limitation of the

8

number of board seats held and the recourse to independent directors. While
the Viénot 2 report (1999) took on a more general perspective. It
recommended the separation of the office of Chairman of the Board of
Directors of the office of Chief Executive Officer and disclosure of the
compensation and options granted to corporate officers. In fine, the Bouton
report (2002) was drawn up following the Enron crisis and aimed at a
contribution to re-establish investor confidence. It suggested a certain number
of improvements concerning the board of directors, the board committees
(audit, remuneration, and nominating committees), the independence of legal
auditors, and financial information.

The second reason comes from the scarcity of research on executive

compensation in France. This may be primarily explained due to the paucity
of data available on this issue. However, transparency on executive
compensation has gradually developed over recent years thanks to laws and
codes of corporate governance on this subject have been established. For
instance, the new economic regulation (NRE) Act of 15 May 2001 requires
listed French companies to publish in their proxy statement the numbers of
WKHLU H[HFXWLYHV¶ WRWDO FRPSHQVDWLRQ DV ZHOO DV VWRFN RSWLRQV DQG DOO IULQJH
benefits paid to each executive manager. This law has been complemented
by the Breton Act of 26 July 2005, which claims listed companies to include in
their annual report all elements of executive compensation and provide a
detailed description of the fixed, variable and other components of
compensation with a view to increase transparency.

The features of governance structure, managerial compensation and tax

aggressiveness are behind our choice of our research question: Do
ERDUGV¶ DWWULEXWHV &(2 FRPSHQVDWLRQ DQG GHPRJUDSKLFV DQG DXGLW
fees relate to the level of French corporate tax aggressiveness?

We are found thereon motivated to address this issue owing to the lack of
evidence on corporate governance structure and CEO compensation in the
literature using recent data on a sample of French firms.

To empirically test our hypotheses, we adopt an OLS regression on a sample

of 43 French listed firms belonging to the SBF 120 index over an eleven-year
period extending from 2005 to 2015. More specifically, we use a fixed effect

9

panel data model to analyze the effect of different model variables on the tax
aggressiveness level.

The remainder of this study is structured as follows. The first chapter

develops a theoretical and conceptual framework for corporate tax
aggressiveness. Section 1 is devoted to clarify the concept of tax
aggressiveness and distinguish it from other closely related concepts. Section
2 outlines some basic theories underlying our research. The second chapter
reviews prior literature and develops our main hypotheses. The third chapter
describes our methodological procedure used to test the hypotheses. In the
first section, we attempt to present, in some detail, the data and the variables
measurements. In the second section, we describe the research
methodology; discuss the findings of multivariate analysis and present the
robustness checks.

10

 CHAPTER 1

Tax Aggressiveness: Concepts

and Theory

I
n the perspective of moral capitalism and business ethics, companies are
required to take on a share and participate in the collective effort to meet
the social needs through tax contributions. However, despite the
increasingly compelling ethical guidance promoted by several organizations
and initiatives such as the UN Global Compact and the Caux Round Table,
tax aggressiveness continues to feature prominently.

The issues of tax-non compliance remain germane in view of the high profile
accounting scandals and unethical practices that highlight the practices of
some large, renowned United States and European firms such as the cases
of KPMG, Freddie Mac and Starbucks.

According to a report released in April 14, 2016 by The Atlantic Magazine,

³FRUSRUDWHLQFRPHWD[HVIXQGHGDERXWSHUFHQWRIWKHIHGHUDOJRYHUQPHQW
LQ  7KDW VKUDQN WR  SHUFHQW E\  :KLOH WD[ KDYHQV DUHQ¶W WKH
sole cause of thLV VKLIW LW¶V ZRUWK QRWLQJ WKDW WKH VKDUH RI FRUSRUDWH SURILWV
reported in tax havens has increased tenfold since the 1980s´.

$ UHFHQW DQDO\VLV E\ 2[IDP $PHULFD RI WKH FRXQWU\¶V  ODUJHVW Sublic U.S.
corporations such as IBM, Walmart, Apple and Pfizer sheds light on how
these multinationals store billion of dollars in offshore shell companies in tax
havens in recent years to avoid paying taxes.

Though this practice is deemed legal, corporate tax aggressiveness does not
just harm the government, it saps wealth from poor countries and prevents

11

crucial investments in priority areas like education and healthcare which leads
to dangerous inequality and hinders important economic growth.

Therefore, tax aggressiveness presents the ethical and governance dilemma

as it may be desired by some shareholders while decried by other
stakeholders.

In order to better grasp this topic, we will first define the concept tax
aggressiveness and subsequently strive to provide some more insights into
the concept and the key topics in relation to tax aggressiveness. Then, we will
examine the theoretical framework of tax aggressiveness by analyzing the
mains theories associated with the investigated concept. These include the
agency theory, the legitimacy and stakeholder theories and the upper
echelons theory.

I. Tax Aggressiveness: Lighting and Distinctions

A. Concept of tax aggressiveness

Conceptualizing an issue requires an accurate and a clear explanation of the

subject matter which makes interpersonal communication easier and more
effective. Indeed, defining a process needed to be well set up in order to infer
the unique attributes, features and characteristics of everything is being
defined, whose meaning is entirely agreed by the whole community. This
should imply that in conceptualizing an issue, an overall consensus
concerning notably the major concern of the accuracy of the definition have to
be approved by the whole world, so that to most people, the merest
mention of any term evokes in the minds of most people the same
understanding.

In particular, regarding the concept of tax aggressiveness, such a consensus

is still not fully materialized or completed. Tax planning, tax avoidance, tax
management, tax sheltering, and even more tax evasion are deemed to have
the same meaning and in most case the same purpose as tax
aggressiveness so that researchers have always used these expressions
interchangeably in their review of tax aggressiveness. In general, the

12

overlapping use of these words is recognized due to their very close
meaning.

Nonetheless, a perusal of several such terminologies as employed by

numerous researches leads to believe the shortage of unanimity on what
really is tax aggressiveness. However, all these terms are used to refer the
lessening of corporate income tax owed to tax authorities, although, this does
not signify that tax-aggressive companies are breaking the law, indeed, the
tax code provisions provide such benefits including fiscal incentives to
mitigate the corporate tax burden. However, the problem comes about the
legalese of tax aggressiveness for instance; the tax law remains unclear for
complex transactions. In fact, there are gray areas regarding the question of
the legitimacy of tax sheltering where the boundary line is yet to be well-
known and still not very apparent, and in most cases the tax authorities find it
hard to properly characterize particular cases. Hence, the tax
aggressiveness¶ concept refers primarily and solely to the efforts deployed by
companies in order to diminish their tax payments.

Thereupon, an emerging body of research that draws on tax minimization

strategies has defined tax aggressiveness as follows: It is a due retrenchment
in taxable income, as per Lanis and Richardson (2011).

As for, Frank et al., (2009); Lanis and Richardson (2012) tax aggressiveness
is an effort made by managers to wind down taxable income via tax planning
activities that encompasses legal or illegal tax planning activities or those that
may lie in between. Therefore, tax aggressiveness may vary throughout a
continuum with a lot of cases that may drop into the gray zone which has not
yet been agreed upon (Gilders et al., 2004).

In line with the existing studies, Chen et al. (2010) document that aggressive
tax strategies are established and implemented by a company in order to
alleviate tax payments through the use of aggressive tax planning and tax
avoidance.

Frank et al. (2009) argue that tax returns qualified as aggressive is the
manipulation to mitigate tax income following a sort of tax planning that may
be deemed to tax management.

13

Tax management is defined in accordance with Scholes et al., 2009; Hanlon
and Slemrod, (2009) as a process its overriding objective is to organize a
corporation in such a way that its tax liabilities remain in the lowest position
according to tax code.

Alternatively, other researchers more narrowly define tax aggressiveness as

the act of ³HQJDJLQJLQVLJQLILFDQWWD[SRVLWLRQVZLWKUHODWLYHO\ZHDNVXSSRrting
IDFWV´.

Tax aggressiveness becomes such a hot-button topic for companies and

governments in every country of the world. In this respect, Lanis and
Richardson (2011) suggest that tax aggressive behavior is becoming an
increasingly part of the corporatH ODQGVFDSH LQWULQVLF¶ FXOWXUH WKURXJKRXW WKH
world. Moreover, recent evidence shows that tax shelters become nowadays
major corporate instruments used to mitigate tax burden.

From a legislative perspective, Bankman (1998) contends WKDW³DWD[VKHOWHU

can be defined as a product whose useful life is apt to end soon after it is
GLVFRYHUHG E\ WKH 7UHDVXU\´ KH FRPPHQWHG WKDW ³WD[ VKHOWHUV DUH WD[
motivated transactions based on a literal interpretation of government
regulations inconsistent with the original intent of the legislation´  :LOVRQ
(2009).

Despite the widespread use of aggressive tax minimization schemes and its
exhaustive character within almost all companies, multinational firms are the
FRPSDQLHV¶ PRVW QRWRULRXV WD[ dodgers. In this regard, Cristea and Nguyen
(2014) show that multinational corporations are the major tax avoiders
through structured transactions among different jurisdictions, by shifting
taxable income from high-tax jurisdictions with relatively high corporate tax
rates to low-tax ones as tax havens. Cases in point include Google, Apple,
Starbucks, IKEA, Amazon, Gap and Microsoft.

For example, IKEA, the 6ZHGLVK PXOWLQDWLRQDO FRPSDQ\ DQG WKH ZRUOG¶V
largest furniture retailer, has been accused of not paying more than 1 billion
Euros in taxes over the 2009-2014 period. After investigations, it was
revealed that the company has funneled much of its sales through
subsidiaries in tax havens mainly Lichtenstein and Luxembourg.

14

Additional evidence emphasizes the noticeable rise in tax aggrHVVLYHQHVV¶
activities from multinational firms by showing a declining trend in effective tax
rates between 1988 and 2003. In 1988 they paid an effective federal tax rate
of 26.5%; in 2001 this was down to 21.4% and in 2003 to 17.2%. And almost
a third of these corporations paid no taxes or received a tax refund in at least
one of the three years between 2001 and 2003. In fact, some companies had
negative federal income tax rates over the entire three years in spite of pre-
tax profits of US$ 44.9 billion during this period.

In the same vein, Rego (2003) examine whether multinational firms exhibit
more aggressiveness in their tax return compared to non-multinational firms.
The author shows that multinational firms enjoy greater opportunities to avoid
taxes associated with their foreign transactions. Lisowsky (2010) further
emphasize the positive association between tax noncompliance and the
multi-nationalization.

What is more, in a more recent study, Steijvers and Niskanen (2014) analyze
the magnitude of privaWH IDPLO\ ILUPV¶ HQWDLOPHQW LQ WKH DFWLYLWLHV RI WD[
aggressiveness within a former agency perspective. Using Finnish survey
data, the authors show through one of the highest worldwide tax alignment
countries that private family firms are less eager to commit themselves into
tax aggressive activities compared with non family firms due to the serious
risk in relation to the noneconomic costs resulting from aggressive tax
behavior in particular the expected break RIWKHFRPSDQ\¶VEUDQGDZDUHQHVV
and loss of SEW.

Richardson et al. (2015) examine another factor that seems to have been
determinant of tax aggressiveness which is times of serious financial distress.
Richardson et al. (2015) are based on a sample of 203 publicly-listed
Australian firms covering the 2006±2010 period to prove empirically the
impact of financial distress on corporate tax aggressiveness. They find that
the aggressive-tax behavior is widely adopted in financially distressed
companies and especially in periods marked by severe macroeconomic
downturns. The excessive use of high levels of tax aggressiveness activities
may be explained by the overwhelming taxes incurred by firms and its
mismanagement resulting in financial distress and, on the other hand, to the

15

burning desire of credit constrained firms to generate additional cash flows in
order to finance their business operations (Edwards et al., 2013 and
Brondolo, 2009).

In light of these trends, we still lack clarity on this construct and hence a
demand currently exists for a universally accepted definition of corporate tax
aggressiveness (Hanlon and Heitzman, 2010).

In an attempt to fill this void and minimize confusion surrounding this concept,
a large body of research on tax avoidance indicates the latter as a ³GRZQZDUG
management of taxable income through tax planning activities, encompassing
all tax planning activities, whether legal, illegal, or falling into the gray area
where the dividing line is not clear. Hence, tax avoidance does not
necessarily imply improper activity. Moreover, it should be noted as to Chen
et al., (2010); Lanis and Richardson, (2012); Frank et al., (2009) and many
other researchers that the terms tax aggressiveness, tax avoidance, and tax
management can be used interchangeably´.

Accordingly, tax aggressiveness denotes several kinds of manipulating

activities specially designed for the purposes of bringing taxable income down
with the aim to reduce the corporate tax burden. It is a management schedule
devised and subsequently implemented by the business income tax division,
an action plan, practices and decisions whose main purpose is to optimize
DQGPDQDJHUHYHQXHVDIWHUDOOFRPSDQ\¶VGHEWVRZHGWRWKHJRYHUQPHQWDQG
other stakeholders.

Tax aggressiveness represents for the most companies worldwide a

tremendous leverage enabling them to boost after-tax income, and hence
seems an undeniable asset, however, it is widely recognized that it does not
merely consists of lessening the tax owed to the Treasury, nevertheless, the
deployment of such activities with the aim of mitigating the tax base, entails
high unforeseeable and excluded costs while are most likely to occur, in
particular those stemming from tax-authority such as penalties and fines and
those arising from agency conflicts including the management' pursuit of
activities and acts conceived primarily to mislead shareholders and generate
at the same time excessive personal perquisites (Desai and Dharmapala,
2006). For that, tax aggressiveness represents an extremely particular and

16

highly complicated tax-related activities endowed with great vagueness for it
is always being accompanied with blurred economic transactions whose
primary designed and conceived by top management and has the central
goal of lessening the corporate income tax which systematically enhance its
profits, in line with this argument, Desai and Dharmapala (2006) argue that
aggressive tax strategies are usually characterized by intricacy, obfuscation
and vagueness, which makes it practically very difficult to be detected. In this
vein, Michael Graetz, asserts that they are arrangements µµGRQHE\YHU\VPDUW
people that, absent tax considerations, would be very stupid¶¶. On the basis
of agency theory and in the same line of thought as Desai and Dharmapala
(2006), Garbarino (2011) states that tax managers broadly use tax-
aggressive strategies as a useful tool placed at their disposal to primarily
serve their own personal interests to the extent that it creates a strained
relationship with the shareholders. On the other hand, Chen et al., (2010);
Frank et al., (2009) document that, companies typically utilize tax-aggressive
activities to boost their net income which conveys a positive signal among
prospective outside investors. In this way, businesses must reduce taxes as
far as possible within the legal framework in order to ensure investors and
financial markets interests.

This construct has therefore manifold conceptualizations, references as well

as sundry modalities to estimate; nonetheless they mostly mean the same
semantic and have one sole objective that target the minimization of the
FRUSRUDWHWD[EXUGHQDOEHLWYDU\LQWKHLULQFLGHQFHRQWKHILUP¶VSHUIRUPDQFH

In essence, corporate tax-minimization strategies can be regarded as a

continuum from tax planning at the bottom limit of the continuum, to tax
evasion following tax sheltering and tax aggressiveness at the other limit
(Hanlon and Heitzman, 2010; Lisowsky, 2010).

Providing their compliance with the legal requirements and ethical guidelines
VHW E\ WD[ DXWKRULWLHV WKH WHUPV ³WD[ DJJUHVVLYHQHVV´ ³WD[ DYRLGDQFH´  ³WD[
VKHOWHULQJ´FDQEHXVHGLQWHUFKDQJHDEO\WRUHIHUWR³DVFKHPHRUDUUDQJHPHQW
SXW LQ SODFH ZLWK WKH VROH RU GRPLQDQW SXUSRVH RI DYRLGLQJ WD[´ /DQLV and
Richardson, 2012).

17

B. Underlying Tax Policy Concepts

This development tends to describe tax aggressiveness in some depth and

provide a conceptual framework within which we aim to distinguish it from
avoidance and sheltering and disentangle the main features associated with.

Simply relying on one single term for example just tax avoidance for in fact a
broad range of miscellaneous actions of explicit income tax reductions may
not proof useful. Thus, a comprehensible classification of tax planning
terminologies would allow flawless conclusions.

With a view to ongoing political debates circulating around noncompliant

corporate tax behavior and a growing public perception of corporate tax
unfairness, it appears particularly important to clearly differentiate effective
tax planning constructs in order to arrive at a shared understanding of the
frequently cited constructs of corporate tax planning which helps promoting
more target-oriented debates and corrective measures and policies of
unwanted tax behavior.

³$Q LPSUHFLVH XVH DQG UHFLWDWLRQ RI GLIIHUHQW WD[ SODQQLQJ FRQVWUXFWV FDQ
increase the risk that opinion-forming institutions, and regulators themselves,
mistakenly convey the impression that any sort of tax planning directed at a
UHODWLYHUHGXFWLRQRIH[SOLFLWWD[HVLH³DYRLGDQFH´LVLQHYLWDEO\LOOHJDORUKDYH
to have at least a connotation of moral doubt. While this might be true for
some constructs, in particular tax evasion, which is conducted with a clear
DQG FULPLQDO LQWHQWWR GHIUDXGWKLV PLJKW QRW EHWKHFDVH IRU RWKHUV´  (Lietz,
2013).

While attempting to be able to better grasp the concept of tax

aggressiveness, it is rather more useful to describe what it is not. Tax
aggressiveness alongside with tax planning, tax avoidance, tax sheltering and
tax evasion, is an example of income tax minimization or a strategy of tax
dodging. These labels, especially tax avoidance and tax aggressiveness, are
not used universally, nor precisely or with a consistent meaning (Hanlon and
Heitzman, 2010), though they have been accepted internationally. Each of

18

these constructs has itself individual features and hence does not necessarily
reflect the exact same set of tax-motivated activities.

The distinction between tax planning, avoidance, aggressiveness, sheltering

and evasion can be viewed as a partially overlapping spectrum of tax
reduction strategies. At one end is tax planning, which is both legal and moral
and, even more importantly, may be to some extent, encouraged by the
government because it strictly follows both the script and the moral of the law.
Unlike tax planning, other tax constructs namely tax avoidance, tax
aggressiveness, tax sheltering and tax evasion aim all at reducing the explicit
tax burden.

At the other opposite end of the spectrum to tax planning, is tax evasion. Tax
evasion is considered illegal and objectionable, both in script and moral,
involving egregiously abusive tax-saving transactions that lead to penalties or
imprisonment or both, if detected by tax authorities.

In contrast to other forms of tax policies, tax evasion constitutes a willful and
conscious non-compliance with tax laws through a due ignorance on their
part of a specific part of law in order to illegally mitigate a corporate tax
liability that legally involves unjustified and forbidden acts and hence leading
to lawsuits.

In respect of tax aggressiveness, tax sheltering and tax avoidance, they fall
between the two on the continuum of tax reduction strategies, exploiting the
form of tax law while denying its substance. They are usually undertaken after
a rigorous reading of the tax laws in an attempt to gain tax advantages from
its defects and loopholes in a manner that is inconsistent with the intent of law
makers (Prebble, 2011). The application of those tax-related activities may
well be technically legal and congruent with the letter of the rule while runs
counter to actual spirit and intent of the rule.

Besides the obvious acts of tax evasion, such tax avoidance facets that draw
on legal means are considered in fact non-compliant in a social sense.

There is often a thin and blur boundary line between tax aggressiveness, tax
sheltering and tax avoidance and in most cases is very difficult to pin down.
Some researchers consider tax aggressiveness and tax avoidance to

19

describe the same construct and hence use them interchangeably. At the
same time, others interpret the two constructs differently and provide different
meaning to each construct which essentially depends on the specific
research context. Tax avoidance and tax aggressiveness are both perceived
to capture different scopes of explicit tax planning.

Considering a useful benchmark-tax strategy is helpful to make clear in the

eye of the beholder both concepts of general tax avoidance and tax
aggressiveness while allowing him to better capture the key differences
between both concepts and refine knowledge about the unique features of
each construct. Several purposeful criterions may be used for example, a
50% probability of a tax position being legally sustainable, social (ir)
responsibility, tax-driven vs. tax-related managerial actions, industry mean
GAAP-or Cash ETR, etc (Lietz, 2013).

Tax avoidance differs from tax aggressiveness in that firms can reduce the
amount of taxes while still taking tax positions that are unlikely to be
overturned by tax authorities.

On the other hand, if firms reduce their tax payments by engaging in tax
minimization arrangements or interpreting the tax code in ways that would be
unlikely to be upheld if the firm were audited, they are exhibiting tax
aggressiveness.

Beyond that, tax aggressiveness and tax avoidance are both tied to tax
sheltering, which denotes the most aggressive type of tax position because it
serves little or no business purpose.

In keeping with Hanlon and Heitzman (2010), Lisowsky et al., (2013) define
tax avoidance to as a continuum of tax-minimization policies ranging from
highly certain (i.e., least aggressive and sustainable) tax positions to highly
uncertain ones (i.e., most aggressive and unsustainable) that are the most
likely to be contested.

In other words, tax avoidance indicates the mitigation of explicit taxes in any
way whatsoever legal, legally doubtful or even illegal (Lisowsky et al., 2013).
And tax aggressiveness represents a subset of tax avoidance spectrum that
covers tax positions with relatively greater uncertainty, in which the underlying

20

positions likely have weak legal support compared to tax avoidance. In this
regard, Hanlon and Heitzman (2010) and Lisowsky et al., (2013) describe tax
aggressiveness as ³pushing the envelope of tax law´

Tax aggressiveness is a facet of tax avoidance that broadly refers to as a

downward management of taxable income via transactions that do not serve
EHKLQGDQ\FRPPHUFLDOSXUSRVHRWKHUWKDQWROHVVHQWKHILUP¶VWD[ELOO

With respect to tax sheltering, it lies in the most extreme subset of tax
aggressiveness, which tests the bounds of legality (Lisowsky et al., 2013).
Indeed, in some cases, sheltering could fall into gray areas of the law when,
for example, ³it does not exhibit economic substance or a business purpose,
that is, when a shelter is created solely for evading tax rather than for fulfilling
a non (or pre-) tax economic need´ (Lisowsky, 2010).

There is no agreed-upon definition of tax sheltering; however it generally

refers to ³the tax-motivated misstatement of economic income with the goal to
reduce explicit taxes´. This is usually done in a fashion inconsistent with any
purposive or intentional reading of the relevant statute or regulation
(Bankman, 2004).

Tax shelter engagement is, in some instances, closely linked, or may even
straddle with the actual evasion of taxes. Yet, some may not be able to
clearly delineate tax sheltering from evasion considering them to be rather
similar in that they share a fraudulent or criminal connotation.

,W IROORZV WKDW DV D ILUP¶V WD[ SRVLWLon becomes more aggressive, it should
also become more uncertain as to whether the tax authority will allow the
related tax benefits.

Tax aggressiveness, tax sheltering, and tax evasion can be subsumed under
the construct of general tax avoidance, given that all of these constructs are
OLNHZLVH DLPHG DW D UHGXFWLRQ RI D ILUPV¶ H[SOLFLW WD[ SD\PHQWV RU OLDELOLWLHV
However, whilst these constructs of explicit tax planning do differ in the
perceived degree of legal sustainability of the transactions they represent on
the one hand and the compliance to tax law on the other hand; they all
describe the explicit avoidance of taxes (Lietz, 2013).

21

Here is a lighter and simplified flow chart of the unifying conceptual
framework of corporate effective tax planning drawn from Lietz (2013).

In Figure 1 Lietz, (2013) shows that apart from the general notion of effective
tax planning, all constructs of explicit tax planning are further arranged along
the dimensions of legality and compliance. The legality dimension ranges
IURP SHUIHFWO\ OHJDO RYHU LQFUHDVLQJO\ ³JUH\-VFDOHG´ WR FOHDUO\ LOOHJDO ZLWK
intent to defraud. The dimension of compliance stretches from strict
compliance, over potentially tax system unfavorable noncompliance, to
apparent noncompliance.

The compliance dimension is interpreted from the tax system standpoint; it

VKHGVVRPHOLJKWRQWKHGHJUHHRI³GHVLUDELOLW\´RU³IDYRUDELOLW\´RIYDULRXVWD[
related actions ranging along the continuum of explicit tax planning.

Despite the legality of certain tax related actions; those actions might be
considered unfavorable to the tax system and could be viewed as
uncooperative towards the collective.

The bottom of Figure 1 provides some tangible examples for tax actions,
which may be subsumed under the corresponding constructs, e.g. the
investing in tax-favored assets, choosing a specific depreciation method,
opting to defer taxable revenue to future assessment periods, classifying
FHUWDLQ WUDQVDFWLRQV DV ³WD[ H[HPSW´ VKLIWLQJ LQFRPH EHWZHHQ GLIIHUHQW WD[
jurisdictions (e.g. tax havens), engaging in tax-relevant transfer pricing, or
setting up particular tax shelter structures.

,QVHDUFKRIDZHOOVSHFLILHGFULWHULRQDQGXVHIXOEHQFKPDUN³UHIHUHQFHSRLQW´
to delineate aggressive tax behavior from general avoidance, Lietz, (2013)
considers the more-likely-than not probability of a tax related transaction
being legally sustainable. A tax position which is equally or less likely to be
sustainable under audit is considered aggressive.

22

 II. Theoretical Underpinnings

Studies on tax aggressiveness and corporate governance typically show that

both concepts are grounded in three major theories, including agency theory,
the legitimacy and stakeholder theories and upper echelons theory.

A. Agency Theory

The tax literature has formerly considered no distinction between the

individual and corporate aspects of tax aggressiveness what makes individual
taxpayer compliance the basis for modeling corporate tax aggressiveness.

Nonetheless, given the prominence of interactions between managerial

opportunistic behavior and tax aggressiveness, earlier researches have
examined corporate tax aggressiveness within a managerial agency context,
for example, Desai and Dharmapala (2006), Chen and Chu (2005), Hanlon
and Heitzman (2010).

There is a plethora of research (e.g. Slemrod, 2004; Hanlon and Heinzman,

2010; Desai and Dharmapala, 2006, 2009; Wang, 2010; amongst others),
that embeds the analysis of tax aggressiveness decision in a principal-agent
framework in which managers pursue their own selfish interest, while
overlooking wealth creation and shareholders¶ welfare. In this way, Slemrod
 GLVWLQJXLVKHV FRUSRUDWH WD[ FRPSOLDQFH IURP LQGLYLGXDO¶V PRGHO DQG
emphasizes that corporate tax compliance ought to be analyzed in an agency
setting.

Aside from Chen and Chu (2005), previous literature presumes that tax
GHFLVLRQV DUH PDGH DQG FRQFHLYHG E\ WKH ILUP¶V RZQHU RU UHVLGXDO FODLPDQW
without giving effect to the nature of the principal-agent relationship.
Nonetheless, this assumption makes sense particularly in small closely-held
corporations while it is not relevant in large, publicly-traded corporations
because tax decisions are usually delegated to managers whether that is the
CEO or the CFO.

24

Finance theory posits that the intended goal of all for-profit businesses is to
maximize the market value of the undertaking which does not often coincide
with the objectives of top managers as they constantly seek their own
personal interests, even if they were on the detriment of the shareholders.
The discrepancy of interests between professional managers and
shareholders leads to the well-known agency conflicts, which appears to be
more severe in large publicly-held companies (Jensen and Meckling, 1976),
due to the separation of ownership and control, in the words of Fama and
Jensen (1983) decision and risk bearing functions.

The separation of control and equity ownership generates the so-called

agency problems; amongst others rent extraction, perquisite consumption,
empire building. Furthermore, management may even manipulate accounting
and financial figures so as to optimize stock-price related option and bonuses
tied to performance.

From an agency perspective, many closely related studies including; Desai

and Dharmapala 2006; Chen et al., 2010; Kim et al., 2011; Seidman and
Stomberg 2012; Badertscher et al., 2013; Annuar et al., 2014; Steijvers and
Niskanen 2014; Armstrong et al., 2015; contend that aggressive-tax schemes
provide managers with a leeway to pursue activities designed to mislead
shareholders such as outright resource diversion. In this way, executives are
able to justify, to some extent, the lack of transparency and inherent
complexity of tax aggressiveness while pretending that such obfuscation and
such vagueness are important features associated therewith to minimize the
risk of being caught by tax authorities for the purposes of tax revenue
manipulation.

Under WKH RVWHQVLEOH WDUJHW RI DOOHYLDWLQJ D ILUP¶s tax payments, managers
have incentive to manipulate tax revenues and understate the tax base by
taking advantages from the loopholes in the tax law that allow them to save
millions in taxes.

Nevertheless, it is important to PHQWLRQWKDWLW¶VQRWWD[DJJUHVVLYHQHss per se

but, rather, WKH DEXVLYH XQVFUXSXORXV DJHQW¶V SUDFWLFHV VXFK DV UHQW
diversion and empire building associated therewith that cause deterioration in
firm value. Tyco is an example of how the complexity and obfuscation of tax

25

avoidance activities provide managers with shields for outright resource
diversion for an extended period of time (Kim et al., 2011). The complexity
FUHDWHG E\ 7\FR¶V WD[ DYRLGDQFH DUUDQJHPHQWV HQDEOHG WKH &(2 DQG WKH
CFO to obscure their rent-diverting activities through different means, masks
and justifications (Desai, 2005).

The UHYHODWLRQRI7\FRPDQDJHUV¶H[WHQVLYHUHVRXUFHGLYHUVLRQVGXULQJ±
2002 caused its stock price to drop from about $95 in early 2002 to $14 in the
middle of 2002.

Tax aggressiveness and managerial diversion are therefore, in the words of

Desai and Dharmapala (2006), complementary activities. More specifically,
tax aggressiveness serves self-interested managers with masks, tools and
justifications to divert the company from its resources which admittedly leads
to unfavorable, damaging consequences affecting the whole company.
Then, it implicitly promotes managerial opportunistic behavior and an
example of this are the renowned Enron collapse as well as other well-known
corporate scandals like Dynegy, Xerox, and Tyco (Graham and Tucker, 2006;
Desai and Dharmapala, 2006).

Against this backdrop, Desai and Dharmapala (2006) provide corroborating

evidence, strengthening the view that tax aggressiveness facilitates
managerial diversion by showing that equity incentives decrease tax
aggressiveness for firms with poor corporate governance compared with
other counterparts i.e. firms with good corporate governance.

Hence, a complimentary relationship between rent extraction and tax

aggressiveness may drive well-governed firms to greater tax aggressiveness
(Desai and Dharmapala, 2006).

Several authors value the usefulness of the agency theory in explaining tax
aggressiveness once tax aggressiveness and managerial diversion are
complimentary, however, in diverse situations, it may not offer a full and
adequate explanation of the association between corporate governance and
tax aggressiveness (Lanis and Richardson, 2011; Boussaidi and Hamed,
2015).

26

A number of researchers in the accounting and management field (e.g.,
Laguir et al., 2015; Ylönen and Laine, 2015; Hoi et al., 2013; Lanis and
Richardson, 2012) have cast doubt on the interpretation of the agency theory
which has mainly concentrated on the relationship between managers and
shareholders suggesting that the primary and paramount objective of a firm is
to maximize shareholder value, while it has not explored the nature of the
contractual relationships DPRQJ ILUP¶V VWDNHKROGHUV who are also important
as shareholders and managers to the ILUP¶VRSHUDWLRQV.

In order to fill this potential gap, researchers and professionals alike have
begun to explore the nature of this relationship within a partnership approach.

B. Legitimacy and Stakeholder Theories

Apart from managers and shareholders, stakeholders include tax authorities,

employees, customers, suppliers, political groups, creditors, and the general
public.

Several authors (e.g. Laguir et al., 2015; Ylönen & Laine, 2015; Sikka, 2013;
Lanis and Richardson, 2012; Chen et al., 2010) have ascribed increased
attention to the association between corporate social responsibility theories
(hereafter CSR) and tax aggressiveness.

At the outset, it is important to clarify the concept of CSR, indeed, according

to Sethi (1975), ³6RFLDO UHVSRQVLELOLW\ LPSOLHV EULQJLQJFRUSorate behavior up
to a level where it is congruent with the prevailing social norms, values, and
H[SHFWDWLRQVRISHUIRUPDQFH´

³The basic idea of corporate social responsibility is that business and society
are interwoven rather than distinct entities´ (Wood 1991).

In other words, Baker (2004) statHV WKDW ³&65 LV DERXW KRZ FRPSDQLHV
manage the business processes to produce an overall positive impact on
VRFLHW\´

From a societal standpoint, taxes are of obvious importance to nations, as the

payment of corporate income taxes ensures the financing of public goods
(and services) including such things as public health care, education, national

27

defense, parks, infrastructure, law enforcement and other basic societal
goods provided for all members of society to reap the benefit from its use
(Lanis and Richardson 2012; Sikka, 2010).

So, since tax payments have a significant impact on the wider community,
then, corporate taxation is regarded as an issue of CSR (Dowling, 2014;
Preuss, 2012).

Accordingly, corporations would keep in mind and take into account the
community, ethical and other stakeholder considerations when it comes to
taxes. In this sense, Williams (2007) argues that, ³7KH most significant issue
that arises in attempting to apply CSR principles to corporate taxation
HQFRPSDVVHV WKRVH DFWLRQV WKDW FDQ UHGXFH D FRUSRUDWLRQ¶V WD[ OLDELOLW\
through corporate tax avoidance and tax planning´ (Cited in Lanis and
Richardson, 2011). Additionally, Sikka,  SHUFHLYHV ³WD[DWLRQ WR VLW
among broader socio- political questions of ethics, social power and state
sovereignty, and hence argues that taxation should be considered to be at
the very core of the debate on CSR´(Cited in Ylönen and Laine, 2015).

If a company undertakes a scheme whose primary or main purpose is to

minimize the tax it ought to the government, then it is considered not to be
SD\LQJ LWV ³IDLU VKDUH´ of tax, the resultant shortfall in corporate income tax
revenue would causes serious losses to the entire society (Lanis and
Richardson, 2011; Slemrod, 2004) as well as reputational damage to the
company among its various stakeholders, what makes tax aggressiveness
broadly regarded to be socially irresponsible (Lanis and Richardson, 2011;
Erle, 2008; Schön, 2008) and illegitimate as well (Lanis and Richardson,
2012).

In support of this view, Laguir et al., (2015) report that French publicly listed
firms that exhibit greater involvement in the social dimension of CSR are less
tax aggressive compared to those who are rather much more involved in the
economic dimension of CSR.

Anecdotal evidence show that a significant amount of taxes is missed due to

revenue transferring operations done by large corporations toward lower tax
jurisdictions countries through tax shifting schemes, thereupon, this prevalent

28

kind of aggressive tax activities makes a government powerless to afford
basic goods and services, and even deprive the firm of its legitimacy in a way
to not be able to perpetuate and sustain in the world of business, because tax
aggressiveness is getting an issue of major concern for the public.

In this way, preliminary investigations and evidence show that the nature of a
ILUP¶V&65DFWLYLWLHVDIIHFWVWKHH[WHQWRILWVWD[DJJUHVVLYHQHVV

CSR stream of theories including particularly stakeholder and legitimacy

theories posit that an implied social agreement or contract is made between
the company and society, the terms of which are stemmed from the
community expectations of corporations (Deegan, 2002).

In this perspective, Gray et al., (1995) recognize the importance of corporate

legitimacy for any company in order to persist and subsist in the business
world, irrespective of how well its financial performance, and hence,
corporations usually seek to sustain and uphold relationships in the broader
environment in which the firm operates. More recently, Waller and Lanis,
(2009) emphasize that corporations are concerned with legitimization to
ensure business continuity, for that, they are always trying to get it from
diverse reference groups within society that have differing degrees of power
and impact onto the company, including principally; communities, political
groups, employees, suppliers and customers, governmental authorities, trade
unions.

This paradigm further asserts that corporations whose ongoing concern is to

be legally and ethically above-board as well as socially responsible within
society, to gain or maintain legitimacy, need to be less aggressive in their tax
reporting (Lanis and Richardson, 2011).

In this regard, Lindblom (1994, cited in Gray et al., 1995) defined

RUJDQL]DWLRQDO OHJLWLPDF\ DV ³D VWDWXV ZKLFK H[LVWV ZKHQ DQ HQWLW\¶V YDOXH
system is congruent with the value system of the larger social system of
which an entity is a part. When a disparity, actual or potential exists between
the two value systems there is a thUHDWWRWKHHQWLW\¶VOHJLWLPDF\´.

In a similar vein and in line with these arguments, plentiful research papers
(e.g. Lanis and Richardson, 2012; Deegan et al., 2002; Guthrie and Parker,

29

1989; Trotman and Bradley, 1981) document that corporate policies that
arouse in the public a strong sense of deceit and spark a societal and
governmental debate for instance, the effect of tax aggressive schemes on
the social welfare, lead to the de-legitimization of the company.

Toward being in a good standing and ensure sound reputation with the
community as well as with tax authorities and in order to achieve legitimacy
within society, an undertaking should comply with the tax law and more
importantly adhere to its underlying spirit (Christensen and Murphy, 2004).

To put in a nutshell, both stakeholder and legitimacy theories claim that

corporations whose are more concerned with community expectations and
usually seek legitimacy within society, are bound to be less aggressive in
their tax- behavior because tax aggressiveness as stated by Sikka, (2010) is
a strategy that is detrimental to the well-being of society. Then, corporate
governance monitoring mechanisms should thus promote compliance with tax
laws and their underlying spirit in order to enable the corporation to exist
within society as a going concern.

C. Upper Echelons Theory

To date, there is a paucity of research in corporate taxation examining the

effect of individual managers RQWKHLUILUP¶s tax strategies. Indeed, executives
were either viewed as homogenous or ignored to matter in the process of tax
aggressiveness. However, existing literature documents the significant impact
of individual top executives on corporate tax aggressiveness.

In addition to the characteristics of the firm and the common observable

attributes of executives (e.g. age, education, tenure and gender), Dyreng et
DOILQGWKDW&(2¶VLndividual attributes are important determinants of
a firm¶V tax aggressiveness.

Differing perspectives assesses the role played by individual top executives in

corporate decisions trying to provide answer to the following issue: How do
executives make important corporate decisions?

30

In this vein, Bertrand and Schoar (2003) assert that the neoclassical
economic theory holds that managers are perfect substitutes and rational
optimizers in other words, managers would take the same rational decisions
when confronted with the same economic instances/situations, including
economic incentives, and, as such, these decisions would not be influenced
by idiosyncratic noneconomic manager features.

Therefore, under this view, managers are deemed to have no role through
which idiosyncratic factors (e.g. managerial style) can influence corporate
choices.

Against this backdrop, agency theory allows a less extreme, but still restricted
role through which idiosyncratic noneconomic manager-specific features
could exert influence on corporate decisions. Indeed, the agency perspective,
DFFRUGLQJ WR &KULVWHQVHQ DQG )HOWKDP  ³DOORZV individuals to differ in
DWWULEXWHV VXFK DV HIIRUW DYHUVLRQ EXW W\SLFDOO\ IRFXVHV RQ ³UHSUHVHQWDWLYH´
agents because monitoring and contractual incentives can induce individuals
WRPDNHVLPLODUFKRLFHV´FLWHGLQBamber et al., 2010).

In this sense, both neoclassical and agency theories marginalize the potential
idiosyncratic effect of individual managers on corporate outcomes.

In fact, the key assumption of this school of thoughts lies in the predominantly
rational behavior of decision makers inside the firm.

Grounded in its core principles and beliefs, published theoretical and archival
research studies of the area that supposedly considered managers/agents as
having homogenous expectations; similar in their cognitive behavior and
values, has typically abstracted from idiosyncratic noneconomic manager-
specific effects on the organizational outcomes in such a way, that a
significant extent of the cross-sectional variation in corporate decisions
remains puzzling and misunderstood.

In contrast to the former view, upper echelons theory contend that individual
characteristics of top management affect their decisions especially in
complex, blurred situations lacking obvious, conspicuous and calculable
solutions, leading to influence corporate strategy outcomes (Hambrick and
0DVRQ¶V.

31

+HQFH DFFRUGLQJ WR WKH XSSHU HFKHORQV¶ view, executives are neither
effectively interchangeable, nor replaceable agents. They are instead
important determinants of the choices made by their firms and the
organizational outcomes. Indeed, Bertrand and Schoar (2003) seminal study
aims to be an empirical evidence for a strong association between
PDQDJHULDOIL[HGHIIHFWVDQGILUP¶VSHUIRUPDQFH

The +DPEULFNDQG0DVRQ¶V theory inspired a new surge of empirical

research in accounting, finance and management, much of which infers the
significant idiosyncratic managers¶ influence on corporate choices.

A great deal of studies has since investigated the impact of idiosyncratic

differences in decision makers on corporate-level decision outcomes. Some
examples of topics covered are the effect of individual managers on
investment, financial, and organizational choices of corporations (Bertrand
and Schoar, 2003) &(2¶V UHQRZQHG VXSHUVWDUV (i.e. being honored by the
business press) and fLUP¶VSHUIRUPDQFH0DOPHQGLHUDQG7DWH, 2009), &(2¶V
overconfidence and corporate investment policies (Huang et al., 2011;
Malmendier and Tate, 2005), managerial overconfidence and/or optimism
and capital structure decisions (Hackbarth, 2008), Individual CEO
characteristics and subsequent firm performance (Kaplan et al., 2012),
Managerial ability and its influences on capital flows (Silva, 2010), on firm-
level investment efficiency and stock price crash risk (Habib and Hasan,
2017) and on firm distress (Leverty and Grace, 2009).

The results of these empirical endeavors document evidence consistent with

the predictions of upper echelons theory, evidence of correlations between
corporate-decision making outcomes and manager-specific measures which
is followed E\WKHFRQFOXVLRQRIGLVFUHSDQFLHVLQWKHPDQDJHUV¶UHDFWLRQDQG
hence decisions taken within a similar economic context.

Research on the influences of top management H[HFXWLYHV¶ personal

characteristics including age, gender, confidence, education, experience and
others in shaping their decision-making and hence on the corporate
outcomes is plentiful. Yet, unfortunately, notwithstanding its unquestionable
importance, previous research has largely overlooked the effect of individual

32

managerial idiosyncrasies on important strategies tax matters and corporate
reporting policy as well.

More recently, scholars, academics and practitioners bring their interest to

managerial reporting behavior by investigating the effect of top executives
backgrounds, behavioral characteristics as well as personal character traits
on firms¶ DFFRXQWLQJ-related strategies with regard to tax aggressiveness.
Specifically, they begin to devote greater attention and focus more narrowly
on the impact of the innate attributes of executiveVRQWKHLUILUP¶Vaggressive
tax strategies, here follows some covered examples of specific managerial
attributes, including overconfidence (Kubick and Lockhart, 2017; Hsieh et al.,
2016; Chyz et al., 2014), narcissism (Olsen and Stekelberg, 2015), Religiosity
(Boone et al., 2012), H[HFXWLYH¶V SROLWLFDO RULHQWDWLRQ (Francis et al., 2016;
Christensen et al., 2015), managerial ability (Francis et al., 2013), Military
experience (Law and Mills, 2017), and so on.

Pioneers of the upper echelons theory, namely Hambrick and Mason (1984)
emphasize that managerial background and demographic traits or
characteristics like age, gender, tenure, education and experience exert, to at
least some extent, a significant influence on strategic corporate decision-
making and eventually on firm performance.

Building on the seminal work of Dyreng et al., (2010), a myriad of eminent

studies in accounting research have increasingly focused on the impact of top
PDQDJHPHQW¶ REVHUYDEOH GHPRJUDSKLF FKDUDFWHULVWLFV RQ ILUP¶V DFFRXQWLQJ
choices. Anchored in the basic tenets of upper echelons theory, Dyreng et al.,
(2010) and many others concurrent research that document, for instance, the
H[HFXWLYHV¶ LQIOXHQFH RQ their FRUSRUDWLRQV¶ voluntary financial disclosure
choices (Bamber et al., 2010); CFO¶VLQGLYLGXDOVW\OH and accounting choices
(Ge et al., 2011); CFO gender and earnings management (Liu et al., 2016)
and more, find conclusively results on the influence of top managers on
corporate decision making and hence on corporate outcomes.

To sum up the main findings of the above-mentioned studies, top

management demographic factors like age, educational background and
functional experience as well as behavioral bias such as overconfidence,
optimism, and narcissism; appear therefore to be a matter of great

33

significance for the wide diversity of operational, financial and accounting
strategies of the firm. These findings lend further credence to the upper
echelons view according to which, not only corporate-level, but also individual
personal characteristics, values and cognitive styles are very relevant for a
better understanding of corporate decision-making besides, to further
enlighten, to at least some extent, the large heterogeneity in corporate tax
aggressiveness among firms that is left unclear and unexplained as well by
more standard models that typically draw on firm, market and industry-level
factors.

Conclusion

Defining the concept of corporate tax aggressiveness appears the major

challenge for this research area. The lack of a definite definition universally
recognized and generally acknowledged by all, prevents to have one
accepted that everybody can relate to. Moreover, this problem of
conceptualization may inhibit an accurate comparison of research findings
that may well be contingent upon the existence of a clear-cut definition.

One direct benefit of tax aggressiveness is greater cash savings. Putting

aside the benefits, reduced tax liability is generally associated with significant
costs. Such costs include expected penalties stemming from interactions with
taxing authorities, expected audit costs, as well as reputational and political
costs of being labeled as tax aggressive firm (Hanlon and Slemrod, 2009).
Tax aggressiveness may also generate potential agency costs namely rent
extraction and perquisite consumption.

The literature on corporate tax aggressiveness is a somewhat relatively

young, while very interesting and fast burgeoning one as new facets are
added progressively owing to the multidisciplinary of the subject. These
facets can be classified into three major streams of literature. The first strand
of research deals with the relation between firm characteristics and tax
aggressiveness. Drawing on the basic tenets of upper echelons theory,
Dyreng et al., (2010) starts investigating a second strand of research in his
seminal work on the impact of top management personal characteristics on

34

corporate tax avoidance. The latter strand of research focuses on corporate
tax governance.

The next chapter blends corporate taxation and corporate governance

literature streams to study the relationship between board characteristics
namely board size, board independence and CEO duality, abreast CEO
attributes (CEO age and tenure), managerial compensation and total audit
fees with corporate tax aggressiveness.

35

 CHAPTER 2

Literature Review and Hypotheses

Development

T
ax is one of the main sources of revenues for a country, which calls on
the government and the parties to look for the factors that would affect
tax revenues. However, from thH ILUPV¶ VWDQGSRLQW WD[HV UHSUHVHQW D
heavy burden that has to be reduced to the minimum extent necessary by
using tax aggressiveness.

As several financial and accounting scandals have multiplied over the past
few years, attention is focused on corporate governance mechanisms to
reduce such manipulative or deceptive activities.

The corporate governance has to oversee the activities of the management

team and on their head the CEO in order to ensure the smooth conduct of the
company; nevertheless it depends on the effectiveness of the corporate
governance mechanisms in deterring corporate tax aggressiveness and
others irregularities.

In this context, numerous studies have been carried out to investigate the role
played by corporate governance mechanisms in preventing such
opportunism, but the majority of them were mainly conducted in the American
context, when it is of great interest, though, to examine the role assigned in
the French context where governance mechanisms have significantly evolved
the past few years and various codes of corporate governance have been
GUDIWHGE\WKHHPSOR\HUV¶DVVRFLDWLRQV0('()DQG$)(3XQGHUWKHQDPHV
of the Viénot 1 & 2 reports and the Bouton report in the wake of the
proliferation of a plethora of much-publicized corporate scandals throughout
the world in recent years.

36

The Viénot 1 report (1995) was mainly interested in the board of directors of
publicly listed firms, expecting to elucidate its mission and to make its work
more effective. It endorsed the removal of the cross- shareholdings and cross
directorships, the constitution of nomination and remuneration committees,
recourse to independent non-executive directors, and a limitation of the
number of board seats held. The Viénot 2 report (1999), quite the contrary,
took, in fact, on a more general perspective. It privileged an approach
allocating companies the possibility to separate the functions of the chairman
of the board and the CEO. This report gave precisions on the notion of
director independence and called for enhancing the role of the independent
directors as well as the information on management remuneration. It also
made recommendations on financial information and communication and on
the role of the general shareholder meetings. In fine, as for, the Bouton report
(2002), it was formulated following the Enron crisis and aimed at an
improvement to re-establish investor confidence, it suggested a certain
number of improvements regarding the board of directors (e.g. stronger
independence, a higher degree of formalization, better information and an
improved assessment), the board committees (audit, remuneration, and
nominating committees), the independence of legal auditors, and financial
information (Charreaux and Wirtz, 2007; Maclean,1999).

Tax aggressiveness becomes, in recent years, a common worldwide practice

that adversely affects the lifespan of corporations, but what keeps hitherto
undetermined is by what specific channels corporate governance alleviates
tax aggressiveness activities.

In this chapter, we analyze the impact of several governance mechanisms

and CEO attributes namely CEO age and tenure, on firmV¶ tax
aggressiveness. Furthermore, we consider the likely linkage between total
fees charged by external auditors and tax aggressiveness.

The alarming increase of high-profile corporate scandals, most notably

WorldCom and Enron have nudged regulators and policy makers, in the past
few years, toward a greater regard for the important role of the corporate
governance mechanisms in monitoring tax policy matters especially, when
oversight mechanisms are remarkably challenged. In this context, Bekiaris et

37

al., (2013) conclude that a major contributing factor to the corporate scandals
is mainly the weakness of corporate governance.

I. Board Structure and Composition

The academic literature has long considered the board of directors as one of
the significant corporate governance device, assigned the task of ratifying
PDQDJHULDO GHFLVLRQV VXSHUYLVLQJ DQG PRQLWRULQJ WKH FRUSRUDWLRQ¶V key
decisions-making. Board members also have the powers such as to fire,
recruit, and establish the compensation policy of senior executives within the
company (Fama and Jensen, 1983).

This organization also takes upon itself the ultimate responsibility for the
FRPSDQ\¶V WD[ DIIDLUV DQG thus, is held accountable for them by the
shareholders of the firm (Erle, 2008).

Worldwide, at the beginning of the new millennium, different codes of good

governance are drawn up at an international level, in an attempt to lessen
agency issues between shareholders and managers, according to Desai and
Dharmapala, (2006) induced by the undue use of opportunistic tax aggressive
activities, through setting-up an effective governance system.

In line with this, Arlen and Weiss, (1995) find that corporate tax savings raise
income retention, which heightens agency issues. More generally, the board
is able to oversee all business activities and approve the strategic decisions
the corporation undertake for numerous stakeholders and to society as a
whole (Rose, 2007). To this end, directors should monitor management in
order to ensure that stakeholder and societal expectations are properly dealt
with (Ibrahim et al., 2003). Therefore, the board of directors is seen to be at
the apex of decision control inside the company (Fama and Jensen, 1983).

For these reasons, government, regulators and policy-makers have drafted

nowadays several key universal principles and recommendations for effective
corporate governance, in part due to the succession of corporate scandals
rocked at the beginning of this decade, but also to attract potential investors
and revive interest in the company (Aguilera and Cuervo-Cazurra, 2004).

38

A number of laws and regulations in terms of corporate governance
requirements, including the Financial Security Law of France, the United
States Sarbanes±Oxley Act of 2002, the German Corporate Governance
Code and many others rules, have been passed so far, are enacted for the
purpose to improve, strengthen and establish good corporate governance
structure in all public companies.

In a later speech Douglas H. Shulman, the former IRS Commissioner,

UHLWHUDWHV µµ« KRZ LPSRUWDQW LW LV IRU D FRUSRUDWH ERDUG WR RYHUVHH DQG
understand a for-SURILWFRUSRUDWLRQ¶V WD[ ULVNDQGWD[ VWUDWHJLHV LQ ODUJH SDUW
because of the potential impact on DQ RUJDQL]DWLRQ¶V ERWWRP OLQH DQG
UHSXWDWLRQ¶¶,56ES, cited in Lanis et al., 2015).

The Internal Revenue Service (IRS) has also suggested ³that good corporate
governance practices, including adequate tax risk management, are
necessary to reduce tax aggressiveness´.

In this context, Salleh and Othman, (2016) assert that the board of directors is
one of the most salient attributes that creates well-established corporate
governance structure and point that good corporate governance serves an
effective shield for the firm to counter corporate fraud.

Moreover, Mr. Shulman adds that WKHµµ«JRDOLVWRSURPRWHJRRGFRUSRUDWH

governance on tax issues and engage the corporate community in a dialog
about the appropriate role of the ERDUGRIGLUHFWRUVLQWD[ULVNRYHUVLJKW¶¶,56
2010a, p. 2, cited in Lanis et al., 2015).

Summarily, the members of corporate boards have a fiduciary responsibility

owed to all compan\¶V VWDNHKROGHUV DQG WRWKH ZKROHVRFLHW\ to ensure that
the firm meets its corporate tax responsibilities and that legal requirements of
the corporation as regards compliance with tax rules are adhered to in
practice this, and only this, would enable the firm to exist within society as a
going concern (Lanis and Richardson, 2011).

In the light of the aforesaid, understanding the connection between the

ERDUG¶V IHDWXUHV DQG WD[ DJJUHVVLYHQHVV LV PXFK PRUH UHOHYDQW HVSHFLDOO\
useful for policy makers, regulators and standard setters in order to take into
account the main factors that potentially impact corporate taxes on the

39

analysis of tax systems through the drafting of effective governance codes
and legal regulations governing that undertaking and to deal with any
shortcomings in the internal tax management practices of enterprises. This
should improve and stimulate the efforts of the government to raise corporate
income tax revenue.

There are a myriad of eminent studies pertaining to the impact of intern

corporate governance mechanisms on firm performance, but only few
published papers have been conducted to investigate whether and how
YDULRXVERDUG¶VFKDUDFWHULVWLFVLQFOXGLQJERDUGLQGHSHQGHQFHDQGLWVVL]HDQG
the duality of the CEO could exert influence on the effective corporate tax
rate, in which its effectiveness is judged in the fight against tax
aggressiveness and other aggressive tax policies related to mitigating tax
burdens (e.g. Minnick and Noga, 2010; Lanis and Richardson, 2011; Zemzem
and Ftouhi, 2013; Salleh and Othman, 2016).

Although, there is a substantial body of the extant empirical tax research that
evidences that firmV¶ with good corporate governance are more likely to
counter extensive tax aggressiveness activities because good corporate
governance serves these companies a great shield to tackle and struggle
against these issues.

Several attributes create therefore an effective board are considered as

salient corporate governance mechanisms that affect the supervisory and
monitoring capacity of the board, including such as board size, board
independence and CEO duality.

A. Board Size

The board size is widely recognized as being one of the most significant
attributes of the board of directors, which allows coping with aggressive
managerial manipulation.

This word, in fact, means ³WKH QXPEHU RI GLUHFWRUV ZKR VLW RQ WKH ERDUG´
(Salleh and Othman, 2016). In examining board size, there is not yet a
consensus on the optimal number of directors who should sit on, however,
the appropriate structure of the board in a company depends upon the

40

characteristics of each undertaking (Coles et al., 2008) and is determined by
WKHILUP¶VE\ODZV.

From a regulatory standpoint, the act of July 1966, as amended by the New
Economic Regulations Act passed in 2001 (known as NRE law), provides that
the board of directors may comprise between three and 18 members. This
number depicts the ideal size that fosters efficient decision-making, quick and
expanded.

Board size has been widely documented by numerous investigators, (e.g.

Yermack, 1996; Firth et al., 2007; Arosa et al., 2013). The literature shows
the linkage between board size and tax aggressiveness may be tenuous. As
a matter of fact, Firth et al., (2007) assert that larger board sizes are
commonly regarded as being less effective particularly in the exchange of
information, knowledge and ideas, and monitoring, instead, heighten the
coalition costs among board members. In this sense, Yermack (1996)
provides evidence that small boards are more effective when compared to
large board size, and that companies with smaller boards perform better and
creates higher market value. %HVLGHV -HQVHQ  DVVHUWV WKDW µODUJH
corporate boards may be less efficient due to difficulties in solving the agency
SUREOHPDPRQJWKHPHPEHUVRIWKHERDUG¶¶.

According to Arosa et al., (2013), larger groups are less effective because the
poorer communication and worse coordination inside large boards overwhelm
the benefits of having more people on whom to draw. Against this
background, Eisenberg et al. (1998) emphasize that communication and
coordination problems are strengthening with increased board dimension. In
this regard, Gonzalez and Garcia-Meca, (2013) argue that the problems of
communication and coordination, considered as a major handicap inside
large boards, prevent companies from quick and efficient decision making.

Following this line of thought, large corporate boards are less able to control
management. A greater number of board members constitute a brake on
KRQHVW GLVFXVVLRQV ZKLFK FRQGXFWV WR D KLJKHU &(2¶V FRPSHWHQF\ ZKR
subsequently readily manipulated the board. This meant that, a larger board
would raise the likelihood of corporate fraud (Beasley, 1996). In this vein,
Lanis and Richardson, (2011) demonstrate empirically that the size of the

41

board is significantly and positively related to tax aggressiveness. Thereon,
Zemzem and Ftouhi, (2013) achieve the same results within French
companies.

Conversely, another focus of research on board size involves the interest of

larger boards. Many studies (e.g. Goodstein, Gautam, and Boeker, 1994;
Forbes and Milliken, 1999; Van den Berghe and Levrau, 2004; Meyer and de
Wet, 2013; Adhikary, Huynh, and Hoang, 2014; Kalsie and Shrivastav, 2016)
evidence a positive association between increased board size and firm
performance.

Proponents of this view argue that a greater number of directors on the board
bring together a greater depth of intellectual knowledge and therefore
improve the quality of strategic decisions that ultimately impact the firm
performance (Arosa et al., 2013). Moreover, embedding the advisory role in
the analysis, larger boards of directors benefit the board from the spread of
expert advice and opinion around the table. Indeed, an additional director
brings more human capital to the company, increasing board information and
specific knowledge about the business. Besides, a large size of the board
increases board diversity in terms of backgrounds, skills, gender, nationality,
experience and expertise of its members. This variety of skills and
competences contributes to the efficiency of the advisory role and thereby, to
better firm performance (Adams and Ferreira, 2007; De Andrés and
Rodríguez, 2008; Linck et al., 2008; Arosa et al., 2013).

In this line, a broad based board allows enough people to more easily and
more quickly manage the workload and mandates of the board; since, the
responsibility is shared among quite a lot members and larger board size
brings more perspectives about economic environment when compared to
small boards (Ammari et al., 2014).

Besides, some researchers argue that firms with larger boards ensure better
monitoring of the financial reporting, enabling those firms to limit managerial
opportunistic behavior.

For instance, Xie et al., (2003) show that larger boards might be better at
inhibiting earnings management. In the same vein, Yu, (2008) finds that

42

small-sized boards appear to be more prone to failure to detect such
managerial manipulation of financial reports, like for example, the known
practice of earnings management done for the purpose of misleading
stakeholders, particularly investors, DERXW WKH FRPSDQ\¶V XQGHUO\LQJ
performance in order to achieve desired motives and show an overly positive
view of a corporate business activities. One potential interpretation of this
effect, for Yu (2008), consists of the greater propensity of smaller boards to
be captured by management, while larger boards are alternately more
capable of supervising the actions of top management. Xie et al. (2003), in
turn, explain the greater and better capacity of a larger board in preventing or
limiting earnings management activities resultant from the opportunistic
behavior of top management, to the fact that larger boards are quite much
more likely to encompass among its members, independent directors
endowed with valuable skills and, hence, firms with larger boards may be
more able to draw from highly qualified independent directors a broader
range of corporate or financial experience.

In the same line of thought, Pearce and Zahra (1992) assert that a sizeable
board stimulates a FRPSDQ\¶V DELOLW\ WR better understand and respond to
various stakeholders as compared with boards having fewer seats.

A number of empirical studies have attempted to explore the nature of the

relationship that links board size to corporate tax aggressiveness. Chief
among them is the study brought by Halioui (2016) which documents a
significant negative correlation between board size and tax aggressiveness.

The board incorporating a big number of directors is endorsed by the agency,

stakeholder and resource dependency theories. Although, stewardship theory
give support to smaller boards for an effective management.

It is noteworthy that stakeholder theorists advocate for larger and well-

diversified boards incorporating diverse stakeholder directors, whose can only
act in the best interest of each stakeholder by ensuring them their various
rights and respect their legitimate expectations in the spirit of promoting CSR
activities within the firm (Ayuso and Argandoña, 2007).

43

Agency theorists, in addition, prefer larger board sizes as they are deemed to
be more likely more vigilant for agency problems due to the involvement of a
greater number of experienced directors in monitoring and reviewing
management actions. Similarly, resource dependence theory argue in favor of
larger boards by putting forth its major advantage, which consists in its
greater opportunity to bring more links and thus access to external resources
needed to maximize the performance of an organization (Kiel and Nicholson,
2003; Kalsie and Shrivastav, 2016).

However, in contrast with the above mentioned theories, according to

stewardship theory, smaller boards are preferred over larger boards in the
way that smaller boards reinforces participation whilst avoiding the free-rider
problem among directors that seems especially pervasive and most likely to
occur in largest boards in addition to its greater and faster ability to achieve a
consensus on important and key decisions (Yermack, 1996).

In summary, there is presently no code of corporate governance that explicitly

refers to an ideal number of directors that should sit on the board, however,
the number of the directors that compose the board was left to the discretion
of the firm, each firm is able to opt freely, according to its needs, the size of
its board of directors within the limits of the relevant laws that may adequately
or VXLWDEO\LQIOXHQFHWKHERDUG¶VRSHUDWLRQVHIILFLHQF\.

The board of directors might not be restrained enough in order to help a

prompt decision making and as large as possible to benefit from a wide
variety of expertise and experience of the directors.

In this respect, a number of researchers like e.g. Lipton and Lorsh (1992);
Jensen (1993) and Wilson et al., (2002), recommend that board size should
not be neither too large nor too small and preferably restricted to seven or
eight, as when numbers beyond that, it becomes tougher for directors to exert
its responsibilities towards the company which creates a gap enabling
managers to seize this opportunity to divert resources through tax
aggressiveness.

Following prior research, we expect board size to influence tax

aggressiveness. We generally assume that small boards are likely to reflect

44

less tax aggressiveness. Then, the hypothesis is as follows: board size is
positively associated with corporate tax aggressiveness.

B. Board Independence

It is well documented that the number of directors has a significant impact on

the board. Nevertheless, there are dissenting views as to how and whether
board independence affects the ERDUG¶VHIIHFWLYHQHVV

Board independence, as one of the salient attributes of boards, is one of the

most widely discussed and studied topic for most of the research on boards
of directors.

All the written codes of good corporate governance throughout the world
recommend greater independence for boards (Zattoni and Cuomo, 2008). An
independent director is defined under the AFEP-MEDEF Code, amended in
November 2016, as those who ³KDV QR UHODWLRQVKLS RI DQ\ NLQG ZKDWVRHYHU
with the corporation, its group or the management that may interfere with his
RUKHUIUHHGRPRIMXGJPHQW´

)XUWKHUPRUHWKHFRGHUHFRPPHQGVWKHIROORZLQJFULWHULRQ³7KHLQGHSHQGHQW
directors should account for half the members of the board in widely-held
corporations without controlling shareholders. In controlled companies,
independent directors should account for at least a third of bRDUGPHPEHUV´

It is therefore required under current codes for each board to include among
its members a considerable part of independent directors not merely to just
PHHWWKHPDUNHW¶VH[SHFWations but, at the same time, to drive improvements
in proceedings quality (AFEP-MEDEF Code, 2016).

Building on the perspectives of leading theorists, in the area of corporate

governance and tax aggressiveness, agency theory implies that appropriate
monitoring mechanisms have to be implemented in order to prevent self-
LQWHUHVWHG PDQDJHUV IURP H[SURSULDWLQJ VKDUHKROGHU¶V ZHDOWK DQG RXWVLGH
GLUHFWRUV KDYH VXFK DXWKRULW\ WR EH ³JXDUGV´ IRU WKH LQWHUHVWV RI WKH
shareholder via monitoring. Then, having a significant proportion of outside
directors on the board may enhance performance through monitoring

45

services (Arosa et al., 2013; Shleifer and Vishny, 1997; Fama and Jensen,
1983).

Nonetheless, having only independent directors in the board may not be

sufficient to ensure good governance control. Fama and Jensen (1983) and
Fama (1980) argue that the effectiveness of the board of directors in
monitoring managerial opportunism is a function of outside directors coupled
with insiders.

On the one hand, outside directors are deemed to be more effective and
more powerful than inside directors in monitoring managers due to their
experience in decision-making gained throughout their professional life, and
also because they have often incentives to build their reputations as experts
having competences in decision control (Fama and Jensen, 1983). In this
sense, Fama and -HQVHQ  IXUWKHU VWDWH WKDW WKH YDOXH RI RXWVLGHUV¶
human capital is mainly based on their performance as internal decision
managers in other corporations.

The labor market for corporate directors assesses the services provided by
outside directors according to their performance as either important decision
DJHQWVRUPDQDJHUVLQRWKHUFRUSRUDWLRQVWKDWLVZK\³RXWVLGH directors use
their directorships to signal to external markets for decision agents that they
are decision experts, they understand the importance of decision control and
WKH\FDQZRUNZLWKVXFKGHFLVLRQFRQWUROV\VWHPV´

Moreover, according to Ghosh et al., (2010), outsiders are expected to be

more objective and more experts than affiliated directors. The independence
of the board is therefore conditional on the number of outside directors who
sit on the board. Then, the inclusion of a high proportion of outside directors
in the board enhances its viability as an internal control mechanism (Fama,
1980; Fama and Jensen, 1983).

On the other hand, an outsider dominated board may create a big loophole
between managers and shareholders as their insight into firm operations is
constrained compared to inside directors who are regarded as the unique
source of firm-specific information for the board (Raheja, 2005). Thus, unlike

46

outside directors, insiders possess a specialized knowledge and better
experience in respect of the inner workings of the firm.

In this regard, Fama and Jensen (1983) suggest that the combination of
outsider and insider directors should be an optimal composition of the board
in order to establish an effective board of directors that serves the company
with an effective mechanism for controlling management actions (Lanis and
Richardson, 2011).

Nevertheless, despite the definite theoretical interpretations on this subject,

the empirical researches carried out show, in fact, mixed results. Indeed,
there are studies that evidence the destructive effect of board independence,
measured as the percentage of external members, on the firm value (e.g.
Bhagat and Black, 2002; Khosa, 2017). In other cases, some studies (e.g.
Rosenstein and Wyatt, 1990; Jay Choi et al., 2007) prove the opposite (i.e.
the positive impact of board independence on the firm value).

The effectiveness of board independence as an internal oversight mechanism

tasked to make sure that managerial actions are in the best interests of
shareholders has been widely studied in the literature on corporate
governance, some examples are the studies of Beasley, (1996); Klein,
(2002); Lanis and Richardson, (2011); Alaryan, (2015); and Wu et al., (2016).

The great majority of studies carried out to date, report the mitigating effect of
board independence on earnings management, tax aggressiveness and
financial statement fraud (Beasley, 1996; Klein, 2002; Xie et al., 2003; Uzun
et al., 2004; Wu et al., 2016). Based on a sample of 692 public U.S.
companies, Klein (2002) shows empirically a decreasing function between
board independence measured by the percentage of outside directors on the
board and abnormal accruals (their proxy used to capture earnings
management). In the same vein, Wu et al., (2016) document a strongly
negative association between board independence and earning
management. Likewise, Beasley (1996) investigates the influence of outside
directors on the likelihood of financial statement fraud using a logit regression
analysis of a sample containing 150 large public companies, 75 fraud and 75
no-fraud firms, Beasley (1996) noticed that fraud firms have boards with
much fewer outside directors in comparison with no-fraud firms suggesting

47

the effective role played by outsiders in decision control as well as in
inhibiting managerial discretion when making important decisions.

Among the most notable studies highlighting the interdependencies between

ILVFDOPDQDJHPHQWDQGWKHERDUGRIGLUHFWRUV¶FKDUDFWHULVWLFVWKRVHEURXJKW
by Lanis and Richardson (2011) who observe that there is a greater and
statistically significant negative impact on the tax aggressiveness of
Australian listed companies with more independent board members. Along
with Lanis and Richardson (2011), Dridi and Boubaker (2015), using a
sample of 21 companies listed on Tunisian stock market over nine years,
from 2003 to 2012, show empirically a significant negative relationship
between the independence of the board and book-tax differences (BTDs) a
proxy for tax aggressiveness.

While, this does not preclude the studies that, on the contrary, evidence a
positive relationship between board independence, tax aggressiveness and
earnings manipulation (e.g. Alaryan, 2015; Amer and Abdelkarim, 2011). Both
Alaryan, (2015) for the Jordan and Amer and Abdelkarim, (2011) for the
Palestine, find by using data from 2010 to 2014 from a sample of 134
Jordanian listed companies and a sample of 22 listed companies for years
2009 and 2010 in Palestine, respectively; that boards with more independent
directors seem to lean in more earnings manipulation activities. These boards
are more likely to help promoting financial manipulation and earnings
management. Consistently with the aforementioned studies, Mulyadi at al.,
(2014) and Mulyadi and Anwar (2015) document both a positive correlation
between independent board and tax aggressiveness. Likewise, in terms of
board independence

3ăXQHVFX HW DO  GHPRQVWUDWH HPSLULFDOO\ XVLQJ D VDPSOH RI 
technology companies listed at NASDAQ and component of Dow Jones index
over a thirteen year period, from 2000-2013, that board independence is
meaningfully involved in determining the level of corporate tax
aggressiveness, that is, board independence exhibit a significant negative
influence on effective corporate tax rate which basically means a positive
association between board independence and tax aggressiveness.

48

On the other side, there are a large number of studies that fail to prove any
significant relationship between board independence and opportunistic
management practices like tax aggressiveness and earnings management,
notably; Minnick and Noga (2010), Zemzem and Ftouhi (2013), Khaoula and
Ali (2012); Tian and Lau (2001); Soliman and Ragab (2013).

Overall, consistent with the extant theoretical literature, we expect a negative

association between board independence and tax aggressiveness. Then, the
second assumption to be tested is as follows: the number of independent
directors on the board is negatively associated with tax aggressiveness.

C. CEO Duality

7RJDLQDJUHDWHUXQGHUVWDQGLQJRIZKDWLQIOXHQFHVWKHERDUG¶VHIIHFWLYHQHVV
in carrying out its main mandate which consists in monitoring managerial
GHFLVLRQPDNLQJDQGSUHYHQWLQJ&(2¶VRSSRUWXQLVPLWLVQROHVVUHOHYDQWWR
investigate the duality role of the board chairman on ILUP¶V WD[
aggressiveness.

CEO duality is another important variable widely considered in the literature

on corporate governance and one potential salient attribute of the board of
director control (Firth et al., 2007) which refers to the situation in which the
CEO and board chairman positions are held simultaneously by the same
person.

Indeed, one of the more recent issues in European corporate governance is

ZKHWKHU ILUP¶V &(2V DOVR VHUYH DV WKH FKDLUPDQ RI WKH ERDUG RI Girectors.
The core tasks of the board chairman are to set the agendas for board
meetings and supervise the process of hiring, firing, assessing, and
compensating the CEO (Jensen, 1993). The CEO, in turn, is the most senior
corporate officer in charge of running a business through making effective
decisions.

The literature reveals a board structure typology, the one-tier system and the
two-tier system. In the one-tier system, the CEO is also the chairman of the
board, while in the two-tier system the two functions are separate.

49

Two diametrically opposed perspectives on CEO duality, notably agency
theory and stewardship theory provide both differing perceptions on the
HIILFLHQF\RIWKHLPSDFWRIGXDOVWUXFWXUHVRQWKHERDUGRIGLUHFWRUV¶VWUHQJWKLQ
terms of monitoring and advising roles.

On the one hand, stewardship theory assumes that managers, left on their
own, will act as responsible stewards of the resources entrusted to him and
IRUWXQDWHO\ WKHUH DUH QR ZRUULHV DERXW H[HFXWLYHV¶ LQFHQWLYH EHFDXVH WKHUH
LVQ¶WWKHSUREOHPRIFRQIOLFWLQJLQWHUHVWVEHWZHHQPDQDJHUVRQRQHVLGHDQG
shareholders on the other side, both interests are aligned to achieve, under a
good organization structure, better corporate performance which is more
strengthened and may be attained more readily especially when the CEO is
also the board chairman. In this sense, Donaldson and Davis (1991) define
managers as safeguards for the returns of shareholders, unless the owner
empowers the manager by delegating much of his or her authorities over the
FRPSDQ\¶V DVVHWV DOORZLQJ KLP WR JHW PXOWLSOH SHUVSHFWLYHV RQ WKH
corporation.

Advocates of this theory argue that when one person accepts both roles, he
or she is more able to make efficient decisions and thus is considered an
effective leader by ensuring to the fullest extent, a coordinating role between
the formulation of the firm strategy and implementation by the CEO (Chen et
al., 2006). In the same line of arguments, Chan et al., (2013) DGG WKDW ³WKH
duality role of chairman can avoid potential rivalry between the CEO and
chairperson and eliminate the confusion as a result of the existence of two
VSRNHVSHUVRQV´. Moreover another core advantage is that duality can prevent
paralysis resulting from the potential disagreement between the two powerful
positions i.e. the CEO and board chairman, on important decisions and
strategies (Chen et al., 2006).

On the other hand, the agency perspective assert that it is reasonable to

assume that in the one-tier system type, CEO-chairman has more power to
dominate, and therefore boards are thought to be as weaker monitors of
executive managers than when the two roles are split, thus giving preference
for the two-tier system.

50

CEO duality reduces the effectiveness of the board of directors in monitoring
management and this creates an environment conducive for managers to
make investments from the resources pertaining to the company in assets
assigned with a higher value under themselves than under alternative
managers which are beneficial for the personal value of the executive rather
than maximizing shareholder wealth. Or, in the words of the American
economist and author Weisbach (1988): "Managerial entrenchment occurs
when managers gain so much power that they are able to use the firm to
further their own interests rather than the interests of shareholders". In this
vein, Dalton and .HVQHU  ZRQGHU ZKHWKHU ³it is appropriate that the
YHU\SHUVRQWREHHYDOXDWHGLVWKHKHDGRIWKHHYDOXDWLRQWHDP´.

The various arguments corroborating the agency perspective argue that

combining the leadership structure consolidates authority in a single
PDQDJHU¶VKDQGVDQGPD\KLQGHUKRQHVWHYDOXDWLRQRIWKHILUPSHUIRUPDQFH
ZKLFKLQWXUQLPSDLUVWKHERDUG¶VDELOLW\WRSURSHUO\SHUIRUPLWVRYHUVLJKWDQG
governance role (McWilliams and Sen, 1997).

By separating the positions, boards are found to be more effective at

monitoring top decisions-makers which helps appease the tension between
managers (agents) and shareholders (principals) in an attempt to align their
interests.

With that in mind, the co-services performed by the board chairman constitute
to put a heavy burden on his/her shoulders. This excessive power confer the
CEO with greater leeway and greater discretion to take a self-interested
decisions that lead to irregularities like those involving frauds and taxes and
decisions that are not in the best interests of the minority shareholders. Then,
it becomes tougher for other board directors to challenge their tax proposals
(Chen et al., 2006; Lo et al., 2010).

Lending credence to the agency view, Khaoula and Ali (2012) using a choice-
based sample of 32 companies quoted on the Tunisian stock exchange for
the period 2000 until 2007, find that CEO duality is positively associated with
corporate tax aggressiveness. Halioui et al., (2016), in turn, also shows a
significant positive relationship between CEO duality and tax aggressiveness.

51

In support of the agency analysis and in accordance with the afore-mentioned
studies, we expect that the duality role of CEO as board chairman can drive
up the level of a corporation's tax aggressiveness to such an extent as to
VHUYHWKHWRSPDQDJHULDORIILFHU¶VLQWHUHVWVLQSDUWGXHWRWKHUHGXFHGFRQWURO
and impaired governance role of the board by the duality service.
Furthermore, the concentrated leadership structure in a one person may
further the ties between executives and directors which can readily approve
the aggressive tax strategy without any objection being submitted.

Based on the above reasoning, we claim that companies with the same
person serving as CEO and board chairman are more likely to adopt
aggressive tax strategy. Therefore, we present the following hypothesis: CEO
duality is positively related with tax aggressiveness.

II. ([HFXWLYHV¶Characteristics and Tax

Aggressiveness

Aside from the undeniable effect of firm characteristics, corporate governance

structure and tax incentives in explaining a good chunk of the heterogeneity
in the level of tax aggressiveness among corporations, there is still a certain
degree of uncertainty thereon which prompts researchers and policy makers
alike to investigate the human effects, particularly the impact of top
managers' personal characteristics on the firm's strategic tax decisions.

A. CEO Attributes

Drawing upon the basic tenets of upper echelons theory, some researchers
examine the influence of executives' demographic characteristics, viz. age
and tenure, on the strategic tax decisions.

Along with Dyreng et al., (2010), Aliani, (2014) cannot identify any significant
association between both CEOs age and tenure and their proclivities to lower
effective tax rates, however, they suggest that CEOs are, at least, partially
responsible for the corporate tax planning strategies within the company
through their exemplary attitude (tone at the top).

52

In fact, the CEO is the exemplary person to follow within the company; he
shares his skills and passes on his know-how to his subordinates. The tax
DGPLQLVWUDWRUV¶ DWWLWXGHV GHSHQG HVSHFLDOO\ RQ WKH UHSXWDWLRQ RI WKH &(2 DV
well as his network of relationships built throughout his career experiences,
he is not an expert or specialist in taxation, he can though set a tone at the
top by delegating the decision-making process inherent to accounting and tax
divisions to the responsible for these divisions (Stock, 2014), which typically
illustrates the considerable but the indirect involvement of the CEOs into the
tax function.

In this regard, the upper echelons theory indicates that the more complicated
and opaque the decision-making, like for instance the decision to engage in
tax aggressiveness and tax avoidance schemes, the more substantial are the
individual characteristics of the decisions makers to exert an influence on
such decisions whether directly or indirectly by setting the tone at the top.

1. CEO Age

:LWKUHJDUGWRH[HFXWLYHV¶DJHLWLVZHOO-documented that it has an influence

on strategic decision-making perspectives and choices (Wiersema and
Bantel, 1992; Hitt and Tyler, 1991). For example, younger executives pursue
riskier strategies and adopt riskier decisions, but more importantly, they are
regarded to be more effective than older managers in terms of their
contributions to better firm growth and variability in organizational
performance (Hambrick and Mason, 1984). While age effects may overlap
with risk propensity, it may instead entail greater firm growth and better
performance.

In corroboration of the upper echelons theory, Serfling, (2014) further argues

that companies with younger CEOs are more prone to make riskier
investments and have thus bigger growth opportunities relative to their
counterparts (companies with older CEOs). In this respect, various
psychological grounds are commonly advocated for this pattern of findings.

Younger CEOs are less risk averse and at the same time more aggressive
than older CEOs who are, according to Hambrick and Mason, (1984), more

53

concerned in that point of their lives with financial and career security. They
rather seek more stability and show more conservativeness in their job.
Besides, they appear to be more reluctant to establish new techniques and to
grasp new ideas. Indeed, they have greater willingness to maintain the status
quo of the firm; they are also more rigid in the adoption of new tools and
practices favoring tax aggressiveness. Furthermore, they find it tough to seize
the new tax opportunities and hardly capture the quick change of the tax
environment (Aliani, 2014), which may be due to the reduced mental and
physical stamina requisite to implement organizational changes (Serfling,
2014), or it may also be due to their risk-aversion attitude. As a result, these
arguments lead to the following hypothesis: tax aggressiveness is negatively
related to CEO age.

2. CEO Tenure

&(2 WHQXUH LV FRPPRQO\ GHILQHG DV &(2¶V WLPH LQ RIILFH LW LV YLHZHG E\ D
great deal of scholars as one of the prominent managerial characteristics as
age, experience, and education, that gives rise to distinct patterns of decision
PDNHUV¶FRJQLWLYHSURFHVVDWWHQWLRQDQGILQDOGHFLVLRQ:LHUVHPDDQG%DQWHO
1992).

Many scholarV LQ WKH MRLQW DPELW RI ILQDQFLDO UHSRUWLQJ DQG H[HFXWLYHV¶
demographic characteristics have searched the answers for the association
between financial reporting choices and executive tenure.

Among the recent studies conducted in this area, most of the results are
supporting the main tenet of the upper echelons theory which recognizes the
pivotal role played by top managers' tenure in decision making.

Chief among them are the studies of Ali and Zhang (2015); Hazarika et al.,
(2012); Baatwah et al., (2015); Schrand and Zechman (2012); Lewis et al.,
(2014).

Hazarika et al., (2012) find that long-tenured CEOs are less involved in
earnings PDQDJHPHQW¶ DFWLYLWLHV ,Q WKH VDPH YHLQ $OL and Zhang (2015)
point out, using a sample eighteen-year period, that a CEO is more likely to
engage in upward earnings management in his beginnings as a CEO within

54

WKH ILUP LQ DQ DWWHPSW WR IDYRUDEO\ LQIOXHQFH WKH PDUNHW¶V SHUFHSWLRQ RI KLV
ability because, in these first years of service, the market is more uncertain
about the ability of the CEO. Similarly, Schrand and Zechman (2012) find that
misreporting firms are often associated with short-tenured executives.
Baatwah et al., (2015) examine variable tenure as one determinant of audit
report timeliness. Based on a 339 firm-year observation, they notice that the
OHQJWKRID&(2¶VMREWHQXUHLVSRVLWLYHO\DVVRFLDWHGWRWKHWLPHOLQHVVRIDXGLW
reports. More specifically, higher tenured CEOs are related with a more timely
completion of audit reports. While, Dyreng et al., (2010) do not find an
association between tenure and corporate tax aggressiveness.

On balance, we expect that CEOs with longer tenure will avoid more tax due
to reduced career concerns. This lead to the following hypothesis: CEO
tenure is positively associated to tax aggressiveness.

B. Managerial Compensation

Focusing on managerial demographics, a couple research studies highlight

the impact of individual managers on tax strategies. Providing further insight
into individual managers, we examine the role played by CEOs¶
compensation in determining the observed level of tax aggressiveness and
how it is related on. This section provides theoretical as well as empirical
evidence on the relationship between executive compensation and tax
aggressiveness.

Executive compensation is widely discussed important issue in the tax

literature. The center of the discussion is mostly around the incentive effect of
CEO¶V compensation in determining the level of corporate tax
aggressiveness. As this is a topical and interesting issue not only to
academics but also to politicians and the popular press, we felt hence
motivated to participate to this debate and examine how CEO compensation
is involved into the process of tax aggressiveness.

In order to gather a better understanding of this concept, we would first and

foremost elucidate the miscellaneous components of the executiveV¶

55

compensation packages and specify trends in CEO pay through time with
regards to tax reporting aggressiveness.

Despite the large heterogeneity in executive compensation practices among

firms and how incentive vehicles are structured and implemented across
companies, most executiveV¶ pay packages include two main components
namely cash-based compensation, which consists of base salaries and
annual bonus plans, and equity-based compensation including, stock options
and stock grants.

The composition of CEO compensation has shifted dramatically over time

with an increased reliance upon stock options and long-term bonus payments
since 1980s (Frydman and Saks, 2010) to render stock options nowadays,
the single largest component of CEO pay (Murphy, 1999).

Executive compensation is thus explicitly and inextricably linked to accounting

returns and to share-price appreciation through annual bonuses and stock
options. The intermediary role that stock options and annual bonuses have
between managerial rewards and stock-price appreciation and enhanced
accounting performance constitutes the predominant factor that has mostly
contributed to the widespread use of such incentives.

Nonetheless, whereas the target is to incentivize and compensate managers

for greater risk-taking (Rego and Wilson, 2012) and reward them for their
worthy efforts to achieve predetermined performance objectives, stock
options also provide favorable tax and accounting treatment, through
deferring taxable income within a certain time frame left under the discretion
of the recipient i.e. in years when tax rates move downward, in addition to its
invisible character from accounting statements (Murphy, 1999).

One of the most important factors that has contributed to the wide-spread use
of stock options-based compensation for executives is the tax policy through
the section 162(m) of the Internal Revenue Code known as the million-dollar
rule (which limited the corporate deductibility of non-performance-related
executive compensation to $1 million) which led firms to rely more on
performance pay, such as stock options because they are fully deductible
rather than other forms of compensation like salary, bonuses and stock

56

grants that do not qualify for the section 162(m) performance-based
exception and are subject to a cap of $ 1 million.

This sharp change in the forms of executive pay overtime and the recourse to
stock-based compensation rather than the other compensation forms has
GLUHFWO\ DQG PHFKDQLFDOO\ WLHG WKH ZHDOWK RI H[HFXWLYHV WR WKH SULQFLSOH¶V
overarching objective that is creating value and increasing shareholder
wealth. According to the principal-agent model, equity-based compensation
helps align both managerial and shareholder interests, thereby reducing the
agency conflicts.

As income taxes place a burden on corporate taxpayers and reduce profits,

managers whose pay is strongly related to their company¶V performance and
highly dependent on the accomplishment of predetermined organizational
objectives, generally show greater propensities to get involved in the process
of tax aggressiveness and engage in such tax reducing strategies. In part,
because shareholders are generally recognized to further risky investment
opportunities such as tax aggressiveness (Armstrong et al., 2015) in order to
maximize their returns and pay less tax. While, it is well-recognized that firms
compensate managers just to allow for some levels of tax aggressiveness
unless the costs associated with outweigh the benefits from engaging in such
activities, it relates specifically to set about a trade-off between the
unavoidable costs arising from greater tax aggressiveness and the benefits of
lower tax payments and efficient business management. Indeed, the
significant costs resultant from high levels of tax aggressiveness, are very
expected to diminish marginal returns for the firm and its shareholders.

In this regard, several researchers have argued the curtailing effect of top
managerV¶ incentive compensation on their FRPSDQLHV¶ HIIHFWLYH WD[ UDWHV
amongst are Armstrong et al., (2015); Rego and Wilson, (2012); Gaertner,
(2014). Although there is no consensus on whether incentive compensation
aligns the interests of managers with those of shareholders or whether it,
instead influence managers to manipulate tax-accounting information for
personal interests.

Anchored in the basic tenets of the agency theory, Rego and Wilson, (2012)
DVVXPH LQ WKHLU SDSHU WLWOHG ³(TXLW\ 5LVN ,QFHQWLYHV DQG &orporate Tax

57

$JJUHVVLYHQHVV´ WKDW HTXLW\ ULVN LQFHQWLYHV DUH HIIHFWLYH FRUSRUDWH
JRYHUQDQFH¶ PHFKDQLVPV XVHG WR PLWLJDWH WKH ULVN DYHUVLRQ EHKDYLRU RI WRS
managers through motivating them to undertake risky tax strategies that are
expected to increase the value of stock option portfolios and generate
positive net present value. Consistent with this prediction, Rego and Wilson
(2012) find that firms at which CEOs have high equity-related risk-taking
incentives are more likely than their counterparts to engage in greater tax
aggressiveness and getting involved into riskier investments.

Using a different research design to Rego and Wilson (2012), Armstrong et

al., (2015) show that high levels of risk-taking equity incentives induce top
managers to invest in greater tax aggressiveness in order to boost the value
of their options holdings, even if it requires to go beyond the level that is
desired by shareholders unless it does not ensure greater personal benefits,
which certainly implies the existence of unresolved agency problems with
respect to tax aggressiveness. Their findings show that this positive
relationship is especially stronger at the upper end of the distribution of their
tax aggressiveness measures (i.e., uncertain tax positions).

However, while reviewing existing empirical findings, there is wide evidence

in support with the notion that incentive compensation diminishes tax
aggressiveness within companies. Then it is revealed impossible to irrefutably
admit any result. In this respect, Desai and Dharmapala, (2006) report a
negative relation between tax sheltering and incentive compensation in poorly
governed firms. Their pattern thereupon suggests a complementary
relationship between sheltering and rent diversion.

In the attempt to overcome the limitaWLRQVLQKHUHQWLQ'HVDLDQG'KDUPDSDOD¶

model, Seidman and Stomberg, (2011) provide alternative potential
explanations of the results achieved. In fact, they attribute the reverse
relationship between incentive compensation and tax aggressiveness to the
substitution effect between deductions for option compensation and tax
minimization strategies in the way that both tools acting as tax shields, arrive
at the same objective that consists in lessening tax payments, rather than to
the complementarities or positive feedback effects between rent extraction
and tax sheltering.

58

Therefore, it is reasonable to assume that CEO compensation enhances
his/her proclivity to invest in greater tax aggressiveness. Three CEO pay
components are evaluated: salary, stock options and total compensation.
Then, our hypotheses are as follows: CEO salary is positively related with tax
aggressiveness, CEO stock options are positively related with tax
aggressiveness, and CEO total compensation is positively related with tax
aggressiveness.

III. Audit Fees

,Q DGGLWLRQ WR IDFWRUV RI ERDUGV¶ FKDUDFWHULVWLFV DQG &(2V¶ DWWULEXWHV ZH
further the analysis by considering the possible association between audit
fees and tax aggressiveness. Hanlon et al., (2012) study whether BTDs are
associated with higher total audit fees. They find a significant positive
DVVRFLDWLRQEHWZHHQILUPV¶WD[DYRLGHUVDQGWRWDOIHHVFKDUJHGE\DXGLWRUV

Donohoe and Knechel (2014) investigate the impact of corporate tax

aggressiveness on audit pricing and find that external auditors of tax
aggressive firms demand higher fees. They find also that the fee premium is
DQ LQFUHDVLQJ IXQFWLRQ RI WKH PDQDJHPHQW¶V XQFHUWDLQW\ DERXW WKH OHJDO
sustainability of tax positions under the inspection of tax authorities.

We suggest that firms paying substantial fees to their external audit firms are
taking greater aggressive tax positions. With the aim to camouflage their tax
misbehavior, companies generally provide independent auditors an increased
risk premium.

More specifically, the expertise of the external audit firm promotes tax
aggressiveness. In other words, the provision of the financial statement audit
and tax consulting services are perceived as determining factors of corporate
level tax aggressiveness. "Overall experts are able to combine their audit and
tax expertise to develop tax strategies that benefit clients from both a tax and
financial statement perspective" (McGuire et al., 2012).

,QWKLVUHJDUG0F*XLUHHWDOILQGWKDWILUPVWKDWKLUHLQGXVWU\H[SHUWV¶

independent auditors which perform both audit and tax services report

59

significantly lower cash and book effective tax rates than other counterparts
WKDWGRQ¶WKLUHH[SHUWVDXGLWILUPV

Given the important role played by the financial expertise of outside audit
ILUPV LQ WKH HIIHFWLYHQHVV RI FRPSDQLHV¶ WD[-planning strategies, firms
JHQHUDOO\ VKRZ JUHDWHU SURFOLYLW\ WR LQYHVW JUHDWHU DPRXQWV LQ DXGLWRUV¶
services in order to exploit the financial expertise of external auditors to
engage in greater tax aggressiveness.

Additional premiums for greater risk taking and supplementary efforts

targeted at reducing taxes paid while remaining an aggressive tax position
sustainable over a longer term and charging fees to remunerate the valuable
services provided by experts audit firms from one hand, in addition to
benefiting from greater tax savings and less uncertainty as to the legal
sustainability of the tax transaction, greater convenience about the
unexpected control of tax authorities and lower tax paid on the other hand,
can indeed be linked in a win-win setting.

Moreover, from the assumption that people are essentially self-interested and
drawing on the core tenets of the agency theory, auditors may behave
opportunistically in the way that they favor their own interests and maximize
their compensation at the expense of their clients.

Building on the above reasoning, we formulate our last hypothesis on audit

fees as follows: total audit fees are positively related with corporate tax
aggressiveness.

Conclusion

This chapter provides a review of a number of factors that affect corporate tax
aggressiveness. First, we examined the determinants in relation to intern
corporate governance mechanisms. The discussion in this frame is based on
the most closely examined mechanisms, notably as regards the board of
director VXFKDVERDUGVL]HGXDOLW\DQGGLUHFWRUV¶LQGHSHQGHQFH

Then, we gave an overview of the role of top PDQDJHUV¶ personal

characteristics in influencing important accounting and tax decisions. For this,

60

we investigate issues in relation to individual executive characteristics
namely, &(2V¶ ELRJUDSKLFDO WUDLWV like, age and tenure and executives like
compensation/incentives. Of the role of the CEO in determining and
influencing the FRPSDQ\¶V WD[ DJJUHVVLYHQHVV the issue of compensation
and/ incentives appears to receive much more attention.

At this juncture, it is noteworthy that board factors and executives

characteristics influeQFH ILUP¶V WD[ DJJUHVVLYHQHVV. We add to that, another
important factor in relation to corporate tax aggressiveness, which reflects
audit fees.

Understanding to some extent the large heterogeneity in corporate tax non-

compliance is paramount to ascertain what factors are most likely to influence
corporate tax aggressiveness in order to help resolve the current debate and
develop measures efficiently in such a way to lessen corporate irregularities
and aggressive practices.

Our developed hypotheses investigate the effect of nine factors. The three
first factors are related to the board of directors. Other factors are related to
the characteristics of the CEO and CEO compensation and the latter factor to
be investigated is audit fees.

In the next chapter, the research methodology and research design to

PHDVXUH WKH ILUP¶V WD[ DJJUHVVLYHQHVV DQG WR test the aforementioned
hypotheses will be detailed.

61

 CHAPTER 3

Methodological Procedures

T
hroughout the latest two chapters, we have attempted to identify the
theoretical framework underlying our research topic. This framework
allows us to prepare for the transition to empirical part, since it led us
to formulate hypotheses to be tested. The first three hypotheses concern the
nature of the relationship between board characteristics and tax
aggressiveness. The second three assumptions postulated concern the effect
RI&(2V¶FKDUDFWHULVWLFVand CEO compensation on firm tax aggressiveness,
and the latest assumption concerns the potential relationship between audit
fees and tax aggressiveness.

Our study is mainly focusing on studying the determinants of corporate tax

aggressiveness as well as the impact of corporate governance variables and
CEO attributes on measures of tax aggressiveness.

In order to investigate what are the core factors that potentially determine the
OHYHORIDILUP¶VWD[DJJUHVVLYHQHVV we utilize a sample of French listed firms
spanning the period from 2005 to 2015.

The objective of this chapter is to describe our sample, to explain the

methodology used to test the above hypotheses, and to present the main
findings.

This chapter is organized as follows. Section 1 details the sample selection

procedure, describes the variables used in the analysis and presents the
univariate analysis. Section 2 presents the methodology adopted to test the
hypotheses, discusses the main results, and presents additional tests and
robustness checks.

62

 I. Data and Variables Construction

This section describes at the outset, the sample selection procedure and lists
the data sources. Then, in the second instance, it proceeds with a discussion
of the constructs of tax aggressiveness, independent and control variables
and the results of the univariate analysis.

A. Data Sources and Sample Selection Procedure

We retrieve a panel of French listed firms belonging to the SBF 120 index
over the period from 2005 to 2015. The companies are simply and randomly
selected and for which all data required are available. Financial institutions
are excluded owing to the specificity of their accounting rules. The data
VRXJKW DUH PDQXDOO\ FROOHFWHG IURP ILUP¶V DQQXDO UHSRUWV DQG UHJistration
documents obtained from WKH $0)¶V GDWDEDVH $XWRULWp GHV 0DUFKp
Financiers) DQGIURPILUP¶VZHEVLWHV2XUILQDOVDPSOHWRWDOL]HG 43 firms and
yields 473 observations.

In what follows, we present the variables definitions, the descriptive statistics

and univariate results.

B. Variables Measurement, Descriptive Statistics and

Correlation Analysis

1. Variables Measurements

We dedicate this development to review commonly used variables and

measures of tax aggressiveness encapsulated in existing studies, and
introduce the variables and tax aggressiveness measure that will be used in
this study while arguing the choice of measures.

For performing the analysis, we considered a series of characteristics, which

will stand as independent and control variables, in order to assess their
influence on tax aggressiveness, the dependent variable.

63

1.1. Dependent Variable

Yet, another crucial issue begging for solution, with regards corporate tax
aggressiveness research, is that of an appropriate and exact measure of tax
aggressiveness.

In this subsection, we tempt to identify and define the most frequent used
proxies to measure tax aggressiveness and provide summary statistics for
each measure.

Indeed, owing to the difficulty in accurately measuring tax reporting

aggressiveness, there is no well-accepted measure of this construct.
Previous researches on corporate tax aggressiveness have developed
several empirical measurements. Maybe, to specify an appropriate proxy for
tax aggressiveness is the most challenging part, and perhaps the hardest one
of the model development, while relying on prior literature, the most reliable
and almost generally used measures might be the effective tax rates (ETRs),
defined as some measure of tax liability divided by income.

Besides ETRs, some emerging alternative measures of corporate tax

aggressiveness exist in taxation literature, such as book-tax differences
(Lisowsky et al., 2013; Lietz, 2013), the discretionary portion of BTDs and
Permanent Book-tax differences (Frank et al., 2009).

Several past empirical studies provide evidence of a link between the BTD-
the difference between pre-tax book income and taxable income- and
corporate tax aggressiveness (Desai and Dharmapala, 2006; Wilson, 2009),
nevertheless, despite evidence that large positive book-tax differences are
associated with aggressive tax reporting, there are certain weaknesses
associated with the BTD-based tax aggressiveness measure, the most
important of which would be the potential bias in estimating taxable income
through financial statements, based on the fact that the taxable income
cannot be directly observed, however estimated using the reported tax
expense stated in the financial statement and grossed it up by the corporate
tax rate.

64

Moreover, it should also be note worthy that large book-tax differences would
not usually signal tax aggressiveness, earnings management and innate firm
characteristics (e.g. capital expenditures) unrelated to aggressive tax
reporting are well evidenced to constitute the primary determinants of book-
tax differences (Manzon and Plesko, 2002; Phillips et al., 2003) what makes
this metric a noisy proxy for corporate tax aggressiveness.

Consistent with the broad majority of current tax research, the total effective
tax rate or widely recognized as the financial accounting effective tax rate,
henceforth ETR, is considered as our primary and sole measure of corporate
tax aggressiveness. It is calculated as the ratio of total tax expense (current
and deferred) to pre-tax book income of the company in the given year.
Unlike the cash effective tax rate, the financial accounting effective tax rate
(ETR) ratio is the most applied metric to better capture permanent differences
between book and tax income (Chen et al., 2010). Besides, according to
Dyreng et al., (2008), the cash effective tax rate is more volatile than the
financial accounting effective tax rate and potentially noisy on an annual
basis.

It is noteworthy that corporate tax aggressiveness impacts ETR in two

different ways. First, through differences (classified as temporary +
permanent) frequently generated by tax aggressiveness activities between
accounting and tax incomes. These differences create variations in ETR as
the numerator is calculated using taxable income while the denominator is
computed using accounting income (Rego, 2003). Second, certain
transactions for instance tax credit and foreign sales corporation (FSC) are
generally deemed as means often used by companies to reduce overall tax
liabilities and ETR captures this form of tax aggressiveness.

The ETR is also used because of the availability of data for the computation
of the numerator i.e. the total tax expense and the denominator i.e. the pre-
tax book income. Besides, it was shown that a strong negative linkage exist
between tax aggressiveness and effective tax rate (Dyreng et al., 2008; Rego
2003; Armstrong et al., 2015), where a lower ETR reflects greater tax
aggressiveness. The support for using effective tax rate metric could also be
found in the study of Chen et al., (2010), which demonstrates an association

65

between the book-tax differences and effective tax rate measure. They
specifically find that both measures are negatively correlated.

Moreover, the ETR measure does not include the effect of temporary
differences between book and tax income which might exclude tax
aggressiveness actions resulting from tax deferral (Phillips, 2003).

1.2. Independents Variables

After defining the measure of tax aggressiveness, we next take a look at

ERDUG RI GLUHFWRUV¶ DWWULEXWHV ZKLFK FRXOG H[SODLQ WKH corporate tax
aggressiveness. We have retained size, independence, and CEO duality.

We further embrace in the analysis several CEO characteristics and

attributes, which have been, identified in prior literature as possible
influencers of our dependent variable, tax aggressiveness. And eventually,
we investigate the relationship between audit fees and tax aggressiveness.

1.2.1. Corporate Governance Variables

Corporate governance characteristics might potentially have a considerable

impact on tax aggressiveness. A set of testing hypotheses are therefore
developed in view of.

Considering corporate governance aspects, we analyze mainly those in

relation to boards, including board size, board independence and CEO
duality.

The first variable we consider is board size which designates the total number
RIKHDGFRXQWVRIGLUHFWRUVVHDWHGRQWKHFRPSDQ\¶VERDUGMeyer and Wet,
2013), it has been shown to be an important feature that can have much to do
with board monitoring and control function.

Existing literature on board size show the latter as it can be significantly

associated to the effectiveness of corporate governance in monitoring
management behavior.

66

A focus on board size is important to learn about its causal effect of corporate
tax aggressiveness. Board size counts the total number of board members at
the end of the fiscal year.

Alongside with board size, we examine another important variable considered

relevant in a study of corporate tax aggressiveness that is board
independence which can be broadly defined as the number of independent
outside directors relative to total directors who dial the board.

An independent outside director is a director RI D FRPSDQ\¶V ERDUG RI

directors who neither was nor has any material or pecuniary relationship with
the firm or any of its consolidated subsidiaries or its management beyond his
or her directorship.

According to prior literature, companies with relatively more independent

directors prove to be less prone to tax aggressiveness. Outside directors are
more willing to monitor deviation, proteFWVKDUHKROGHUV¶LQWHUHVWVDQGSUHVHUYH
their wealth against managerial opportunism. The expertise and
independence of outside independent directors enables them to assess and
evaluate aggressive tax strategies more objectively and make independent
judgments for the performance in the firm. Board independence is measured
as the percentage of independent board members as reported by the
company.

A third component that may touch to corporate governance is CEO duality.

Duality is a board structure control mechanism which is defined as
combination of the CEO and chairman positions. According to Rechner and
Dalton (1991), CEO duality occurs when the CEO also occupies the chairman
position of the board of directors. Unlike the U.S., most of the European
countries exhibit a non-duality structure.

Following prior literature, we include this variable since it has been well
evidenced to have influence on corporate tax aggressiveness. In this vein,
Minnick and Noga (2010) were the pioneers to include CEO duality in the
context of tax management for U.S. companies. They argued that a leader
who combines the functions of CEO and board chairman had no reason to
engage in tax management activities, albeit they fail to prove empirically the

67

significance of this variable. Duality is a dichotomous variable, coded as one
if the CEO holds also the board chairman position and as zero otherwise.

Besides the apparent impact of board of directors attributes on ILUP¶V tax

aggressiveness, CEO characteristics are also considered of great relevance
when studying the focal determining factors influencing corporate tax
aggressiveness.

The second category of independent variables then consists of CEO-level

characteristics.

1.2.1. CEOV¶6SHFLILF9DULDEOHV

Managers must be permitted some degree of judgment in selecting reporting

estimates, disclosures and methods appropriate to the underlying business
economics of the company, in order for financial reports to convey more
valuable and useful information to users. )LUP¶V PDQDJHPHQW GHFLGHV KRZ
information is to be presented, so there is a risk of tax aggressiveness,
whereby managers VHOHFW UHSRUWLQJ PHWKRGV ZKLFK GR QRW UHIOHFW WKH ILUP¶V
underlying economics.

To examine the effect of CEO characteristics on corporate tax

aggressiveness, we concentrate the analysis in three hypotheses related to
&(2V¶FRPSHQVDWLRQDJHDQGWHQXUH

Researchers surrogated CEO compensation for corporate governance as

internal governance device. To account for CEO compensation, Armstrong et
al., (2012), being among the first to investigate this variable in a corporate
tax-setting. They advocate that the extent of being aggressive in tax reporting
well depends on the compensation of tax directors, which basically means
that the more incentives a tax director has to reduce the tax expense, the
more aggressive the tax avoidance will take place. In the same vein, Rego
and Wilson (2009), examine these issues and find particularly a strong
positive association between CEO and CFO total compensation and the level
of corporate tax aggressiveness. They provide strong evidence that CEO and
CFO compensation leads to greater tax aggressiveness, by showing
consistent results across six different measurements of tax aggressiveness.

68

7KHVH DUJXPHQWV SURYLGH HYLGHQFH WKDW &(2¶V FRPSHQVation has a
pronounced impact on firm tax aggressiveness.

CEO pay represents CEO compensation in euro and encapsulates salary,

bonuses, value of stock options, value of restricted stock granted and other
compensation; we conduct the analysis on the basis of total compensation,
as well as divide these components into equity-based and cash-based
compensation with the aim to accurately measure the impact of CEO
compensation on corporate tax aggressiveness level. The distinction between
the different forms of compensation is outlined in the second section of the
literature review.

Cash-based compensation is measured as the sum of base salary, and other

annualized cash payments paid to the CEOs. Equity compensation
represents therefore the non-cash pay that may take many forms, including
notably, restricted stock and stock options.

What is more, we used to express these variables in the log value in order to
partially correct the normal distribution.

Regarding other CEO characteristics, notably age and tenure, there is scarce
evidence on the effect RIWKH³WRQHDWWKHWRS´on corporate level tax reporting.
Recent studies show that the tone at the top affects various corporate policies
(Bertrand and Schoar, 2003). In the corporate tax setting, Dyreng et al.,
(201ILQGWKDWPDQDJHUIL[HGHIIHFWVH[SODLQDVXEVWDQWLDOYDULDWLRQLQILUP¶V
effective tax rates (ETRs).

Moreover, prior research suggests that CEO related characteristics are

important factors explaining personal and corporate level risk-taking behavior.

Many scholars have investigated the risk-WDNLQJ SDWWHUQV LQ PDQDJHU¶V

decision-making and studied whether there is age-related variance in their
behavior.

The findings of the empirical investigations mostly bare a significant

relationship between individualV¶age and their propensity to take risk. Indeed,
older individuals are more prone to choose less risky alternatives in decision-

69

making than younger individuals who are deemed, according to the
investment behavior research, less risk averse than older ones.

As tax aggressiveness qualified as per Armstrong et al., (2015) as a risky

investment that involves risky expected tax savings, we expect then that CEO
age and tax aggressiveness to be negatively correlated. CEO age measures
the age of individual CEOs in years.

The impact of CEO tenure on firm performance is somewhat more ambiguous

and uncertain than other CEO characteristics like, for example age. In this
way, prior studies have documented conflicting results on the relationship.

Tenure represents the length of time expressed in terms of years during

which a CEO has been at the helm of a company i.e. held an executive
function in the company for which we examine the data.

CEO age and tenure are both an intriguing perspective to corporate

governance, though are not well studied in the area of corporate tax reporting
which, in turn, would makes interesting to investigate whether these abreast
CEO characteristics have influence on corporate tax aggressiveness.

1.2.3. Audit Fees

There is admittedly scant evidence on how auditor fees relates to tax

aggressiveness. Most of the literature in the area mainly focuses on the role
of the external auditor in corporate tax aggressiveness in the U.S. through the
provision of auditor-provided tax services. According to this strand of
research, industry expertise in taxation of audit firms leads to a fee premium
only for their tax aggressive clients.

We investigate whether audit fees influences corporate tax aggressiveness

practices of French listed firms. Thence, we expect a positive relationship
between tax aggressiveness and audit fess.

In doing so, we measure audit fees as the logarithm of total fees charged by
external auditors.

70

1.3. Control Variables

)DFWRUV RWKHU WKDQ &(2¶V FKDUDFWHULVWLFV DQG &RUSRUDWH *RYHUQDnce

structure can also influence corporate tax aggressiveness.

Several studies have put emphasize on firm-specific characteristics in an

attempt to better apprehend the cross sectional variation in corporate tax
aggressiveness. Gupta and Newberry (1997) stXG\ ILQG WKDW ILUP¶V VL]H
profitability, capital structure and asset mix are associated with ETRs.

Following prior literature, we include for this study four control variables that
are commonly found so as to affect costs, benefits and opportunities to
engage in aggressive tax activities, specifically firm size, firm performance,
intangibles and capital intensity.

1.3.1. Firm Size

Firm size is measured as the natural logarithm of total assets and refers to
the dimension of a firm. For a host of reasons, firm size is the most variable
largely used in corporate tax aggressiveness research. Yet, what remains
ambiguous is the directional relationship between firm size and tax
aggressiveness.

From the agency theory perspective, sizeable firms face higher agency costs
(Jensen and Meckling, 1976), and hence, unresolved agency problems may
in fact drive CEOs to invest in extreme levels of tax avoidance beyond the
level that shareholders would otherwise favor.

In line with this prediction, another argument advanced by other theorists

suggest that larger firms pay less income tax than small firms because they
have more power and can allocate more resources to tax planning activities
and lobbying efforts.

Moreover, Armstrong et al., (2009) refer the positive association between firm
size and tax aggressiveness to the fact that large firms have sophisticated
internal tax departments due to the presence of economies of scale of tax
planning.

71

In this vein, several studies show that larger firms tend to invest in greater tax
aggressiveness (Dyreng et al., 2008; Wilson, 2009). In particular, using a set
of companies identified as tax shelter participants, Wilson, (2009) develops a
profile of the type of firm that likely engages in tax sheltering and finds, inter
alia, that tax shelter firms are larger in terms of size than other non-tax shelter
firms.

On the other hand, the political cost theory (Zimmerman, 1983) argues that
larger firms are less involved into tax management activities and thus bears
higher ETRs than small counterparts.

Using ETRs as a proxy for political costs, larger firms are generally more
exposed to political scrutiny and pressures from tax authorities than small
firms, which make larger firms less incentivized to engage in tax
aggressiveness for fear of the government and regulatory bodies, while
bearing high ETRs. So, since the taxes paid represent political costs, larger
firms are more subject to higher tax burden in relation to smaller firms.

Consistent with this perspective, Rego (2003) and Mills et al., (1998) both find
a positive relation between ETRs and firm size. Rego (2003) shows that
larger firms are more likely than small firms to undergo political costs which
create fewer opportunities for tax aggressiveness and likewise increase their
ETRs.

Given that the empirical evidence on the relation between firm size and tax
aggressiveness is mixed and none consensual opinion has been reached
until today about this relationship, no directional relation can therefore be
conjectured.

1.3.2. Profitability

Another obvious factor with capacity to affect corporate tax aggressiveness is

firm profitability. The analysis of this indicator is also fundamental in order to
LQYHVWLJDWH ZKLFK IDFWRUV WKDW PD\ LQIOXHQFH D ILUP¶V WD[ DJJUHVVLYHQHVV
Profitability is proxied by the firm Return On Assets (henceforth ROA, the
ratio of earnings before extraordinary items divided by total assets).

72

This variable is embedded in the analysis mainly due to the inclusive impact
RI ILUPV¶ SURILWDELOLW\ RQ FRPSDQ\¶V WD[ DJJUHVVLYHQHss. The first strand of
literature argues that more profitable firms would be less tax aggressive and
incur therefore higher ETRs. Several studies have been conducted in this
respect to provide evidence that a firm with relatively higher profits is less
eager than other firms to engage in tax aggressive activities (Dyreng et al.,
2008; Frank et al., 2009; Gupta and Newberry, 1997; Badertscher et al.,
2013; Wilson, 2009).

Another strand of literature (e.g. Manzon and Plesko, 2002) holds that
profitable firms are more able to take advantage from tax exemptions and
utilize tax credits and tax deductions in a more efficient way, these firms
exhibit higher book-tax differences. In this perspective, Rego (2003) argues
that more profitable firms incur generally lower costs associated to tax
management since they have more resources than other firms to invest in tax
planning activities.

Overall, the results of these studies indicate that profitability is significantly

associated to tax aggressiveness, while the direction of this relation is unclear
which results in inclusive inferences in the extant literature.

1.3.3. Capital Intensity

Besides profitability and size, it is plausible that since corporate Tax Act
endows tax incentives to stimulate firm investment, firm asset composition
influence tax aggressiveness due to income tax deductibility of depreciation
and tax exemption from an investment (Gupta and Newberry, 1997). Firms
with depreciable assets have increased depreciation expense and can
implement non-liability tax reduction effect through depreciation expense and
tax exemption from an investment. Therefore, higher capital intensity, as
measured by the ratio of property, plant and equipment to total assets, may
lead to lower tax aggressiveness (i.e. higher effective tax rate) tendency
because of the availability of various means for capital intensive firms to
mitigate tax. Yet high capital intensity can increase depreciation expense and
the firm can make attempts to manipulate by decreasing the useful life of the

73

asset, choosing the depreciation method. This leads to a high possibility of
committing tax aggressiveness.

To capture such possibility, we come up with a hypothesis of a negative

relationship between tax aggressiveness and firm capital intensity.

1.3.4. Intangibles

Along with firm capital intensity, and drawing from prior literature, it seems
DOVRLPSRUWDQWWRQRWHWKHSRWHQWLDOLPSDFWRIILUPV¶LQWDQJLEOHDVVHWVRQWKHLU
need to manage taxes. For this, we include the variable intangibles measured
as the ratio of intangible assets to total assets as a control variable in the
regressions to capture differences often generated by intangible assets
between book and taxable income that can affect our tax aggressiveness
measure.

We present the variables definitions, measurements and expected signs in

Table1.

During the course of this development the sample of French listed firms that
has been used for this study has been discussed in detail. Also, the chosen
corporate governance and CEO variables and control variables have been
clarified. Now, the findings of this study can be discussed.

74

Table 1 Variables Definitions and Expected Signs
Expected
Abbreviation Measurement
sign
‫ݏ݈ܾ݁ܽ݅ݎܽݒݐ݊݁݀݊݁݌݁݀݊ܫ‬
Board size ‫ ܧܼܫ̴ܵܦܴܣܱܤ‬Total number of board
൅
members
Board ‫ ܦܰܫ̴ܦܴܣܱܤ‬Percentage of independent
െ
independence board members
CEO duality ‫ܮܣܷܦ̴ܱܧܥ‬ Indicator variable equals to 1 if
the functions are separated ൅
and 0 otherwise
CEO age ‫ܧܩܣ̴ܱܧܥ‬ CEO age in years െ
CEO tenure ‫ ܧܴܷܰܧ̴ܱܶܧܥ‬CEO tenure in years ൅
Salary ܵ‫ܻܴܣܮܣ‬ Logarithm of salary in euro ൅
Stock option ܱܵܶ‫̴ܱܶܲܭܥ‬ Logarithm of stock option in
൅
euro
Total ܱܶܶ‫ܲܯܱܥ̴ܮܣ‬ The sum of salary and stock
൅
compensation option
Audit fees ‫ ܵܧܧܨ̴ܶܫܦܷܣ‬Logarithm of total audit fees in
൅
euro
‫ݏ݈ܾ݁ܽ݅ݎܽݒ݈݋ݎݐ݊݋ܥ‬
Firm size ‫ܧܼܫ̴ܵܯܴܫܨ‬ Logarithm of total assets ൅Ȁെ
Firm ܴܱ‫ܣ‬ Net income to total assets
൅Ȁെ
performance
Intangibles ‫ ܵܧܮܤܫܩܰܣܶܰܫ‬Intangible assets to total assets ൅Ȁെ
Capital ‫ ܶܰܫ̴ܮܣܶܫܲܣܥ‬Net property, plant and
െ
intensity equipment to total assets

2. Descriptive and Correlation Analyses

The descriptive statistics of the dependent variable, independent and control

variables are displayed in the table below.

75

Table 2 Descriptive Statistics
Year Variables Mean Standard deviation Minimum Median Maximum
dependent variable
All ETR ͵ͳǤͷͶͲͺͺ ͳ͵Ǥ͸ʹʹ͵Ͷ ͲǤͲͲ͵ͻ͹ ͵ͲǤ͸ʹ͸ͷͻ ͻͳǤͲ͵͹ͻͶ
2005 ETR ͵ͳǤͶͳ͸͹͹ ͳ͸ǤͶͶ͹ͻͷ ͶǤ͸ͷͻ͸͸ ͵ͲǤͻͲ͵͹ͻ ͻͳǤͲ͵͹ͻͶ
2006 ETR ͵ʹǤʹ͵Ͷͻͺ ͳ͸Ǥ͵͸ʹͺͷ ͵ǤͶ͸ͶͻͶ ͵ͳǤͷ͹ͷͷ͹ ͺ͵ǤͺͶ͸ͳͷ
2007 ETR ʹͻǤʹͷͻ͸ͷ ͳͳǤͻͶʹ͹ͷ ͶǤ͹Ͷͻ͹ ͵ͲǤʹ͵ʹͷ͸ ͸ͲǤͻ͹ͷ͸ͳ
2008 ETR ͵ʹǤͲͷ͸ͳͳ ͳʹǤ͹ͳͺͺͺ ͳǤͺͻ͸Ͳʹ ͵ͳǤͳͷ͹ͷ͵ ͹ͺǤʹͺͻͲͻ
2009 ETR ͵ͳǤ͹ͷ͸͹͹ ͳ͸ǤʹʹͷͲ͵ ͳǤ͸͵Ͷ͹ʹ ʹͻǤͷͲͳͷʹ ͺͶǤͲͶͻͲͺ
2010 ETR ͵ͲǤͷ͵Ͷ͵͸ ͳͷǤ͵ͷʹ͹ͺ ͳǤ͸͵Ͷ͹ʹ ʹ͹ǤͺͳͺͶͷ ͺͶǤͲͶͻͲͺ
2011 ETR ͵͵ǤͷͳͺͶ͵ ͳͷǤ͵Ͷʹͻͻ ͳ͸Ǥͷʹ͹͸ͻ ʹͻǤͺͲͲͺͶ ͺͶǤͲͶͻͲͺ
2012 ETR ͵ͳǤ͹͹ͺͻ͵ ͳͳǤͺ͸͸͵Ͷ ͲǤͻͺ͵͸ͻ ͵ͲǤ͸Ͷʹͷ ͸ͲǤʹͷͳͲͷ
2013 ETR ͵ʹǤͳͳͷ͵Ͷ ͻǤͺͳͳ͸͹͸ ͲǤͲͲ͵ͻ͹ ͵ͳǤͺ͵Ͳͳ ͷ͵ǤͲ͵ͻͺ͵
2014 ETR ͵ʹǤͳͳͷ͵Ͷ ͳͲǤͷͲ͹Ͷͺ ͸Ǥ͵͹͵Ͳͳ ͵ʹǤͷ͹ʹͲͷ ͸͹Ǥͳ͹ʹͻͷ
2015 ETR ͵ͲǤͷ͵͵Ͷ ͳʹǤͳ͹Ͷͺ͵ ͹ǤͻͲͷʹ͹ ͵ͲǤͲͻͳ͸͵ ͸͹Ǥͳ͹ʹͻͷ
Independent variables
BOARD_SIZE ͳʹǤ͵Ͳ͸ͷͷ ͵Ǥͺͳͷͺʹͳ ͵ ͳ͵ ʹ͵
BOARD_IND ͲǤͶ͹Ͷͳ͹ʹͻ ͲǤͳͺͶͲͲͷ͵ Ͳ ͲǤͶͶͶͶͶͶͶ ͲǤͻͲͻͲͻͲͻ
SALARY ͳ͵ǤͺͳͶͻͷ ͲǤͺ͸ͲͶʹͻ͵ ͻǤͶ͹ʹ͹Ͳͷ ͳͶǤͲͶͺ͸ ͳͷǤʹ͸͸ͷͶ
STOCK_OPT ͳʹǤͷͻͳʹ͸ ʹǤͺ͸͹Ͷ͹ Ͳ ͳ͵ǤͶ͵Ͳ͹ͳ ͳͷǤ͸ͳ͹ͺͺ
TOTAL_COMP ͳ͵ǤͻͻͲͺͺ ͲǤͻͲͷͳͲͻͳ ͻǤͶ͹ʹ͹Ͳͷ ͳͶǤʹͳ͸͵ͳ ͳͷǤ͹ͷͺͲͶ
CEO_AGE ͷ͸Ǥ͸͸ͳ͹͵ ͹Ǥ͸ͺͺͲʹͳ ͵Ͷ ͷ͹ ͺͳ
CEO_TENURE ͳͲǤ͵ʹ͵Ͷ͹ ͻǤ͹ͳͶͷͳ͹ ͳ ͹ Ͷ͹
AUDIT_FEES ͺǤͷ͹ʹͻͶʹ ͳǤʹ͸ͻʹͲʹ ͷǤͺͻͳ͸ͶͶ ͺǤ͹Ͷͺ͵Ͳͷ ͳͳǤ͵ͻͷʹ͹

76

Table 2 (continued)
Standard
Year Variables Mean Minimum Median Maximum
deviation
Control variables
FIRM_SIZE ʹʹǤͶͷ͵͵ ͳǤͻ͸ʹͺ͵ͺ ͳͷǤ͸Ͳͷʹ͹ ʹʹǤͶͳͳͷͳ ʹ͸ǤͲͺ
ROA ͷǤͳ͸͹ͻ͹͵ 6.027411 െ͵ͳǤͲͻ͵ͳͳ ͶǤ͸ͷͻ͵Ͷ ͵ͺǤͺ͵͵Ͳͳ
CAPITAL_INT ͲǤͺͻ͹ͷͶ͹͹ ͶǤ͸Ͷ͵͵Ͷͺ ͲǤͲͳͳ͹͹͵ ͲǤͳͷͶʹͲͳͻ ͶͳǤ͸ͳͻͻͳ
INTANGIBLES ͲǤʹ͸ͺ͹͹ͻ͸ ͲǤͳ͸͸͹͸ʹͷ Ͳ ͲǤʹ͵ͶʹͶͲʹ ͲǤ͸ͺͺʹͷͷͺ
Where: ETR: Effective Tax Rate, measured by the total tax expense scaled by pre-tax book income. BOARD_SIZE: board size, measured by the total number of
board members. BOARD_IND: board independence, measured by the number of independent directors to total number of board members. SALARY: CEO salary,
measured by the logarithm of annualized CEO salary in euro. STOCK_OPT: CEO stock option, measured by the logarithm of CEO stock option in euro.
TOTAL_COMP: CEO total compensation. CEO_AGE: CEO age, measured by the age of CEO in years. CEO_TENURE: CEO tenure, measured by the number of
years the CEO has been in office. AUDIT_FEES: audit fees, measured by the logarithm of total audit fees in euro. FIRM_SIZE: firm size, measured by the logarithm
of total assets. ROA: Return On Assets, a measure of firm performance, calculated as the ratio of net book income to total assets. CAPITAL_INT: capital intensity,
measured by the ratio of net property, plant and equipment to total assets. INTANGIBLES: intangibles, measured by the ratio of intangible assets to total assets.

77

Table 2 shows proof that our study variables are normally distributed, since
the mean values are very close to median values in all variables except
CAPITAL_INT.

Our dependent variable is tax aggressiveness measured by ETR ratio. The

average income taxes paid by the companies is about 31% (median 31%), is
not strikingly low relative to the France income tax rate (33%), which could
possibly be considered to be due to the fact that the average French
companies are not tax aggressive nor accustomed with such practice and are
compliant with tax legislations, yet there is a high variability across
companies, ranging from a minimum of 0.04% to a maximum of 91%. The
companies that report an ETR value close to zero might been getting the
most benefit from tax advantages and exploit the tax loopholes for their own
good in a manner inconsistent with the intent of the tax law using legal
means, though, but deemed non-compliant, particularly, through referring to
the valuable recommendations of the specialists and tax advisors on their tax
positions, and how effectively increase their tax optimization and after-tax
earnings. In the same time, there are some companies that pay huge level of
tax (91%), or they registered losses. The standard deviation is about 14%.

This table also displays the annual slight shift in the ETR mean in our sample.
The tax expense paid by the companies remains fairly stable on average over
the entire period from 2005 to 2015. The annual ETR mean range in the
interval [29.26%; 33.52%]. The standard deviation varies between 9.8% in
2013 and 16.45% in 2005, which means that the cross company tax
aggressiveness differences are at their lowest value in 2013, and their
highest in 2005. This finding on the ETR is in line with Minnick and Noga
(2010) and Dyreng et al., (2010) both report an average ETR equals 30.90%.

With regards to the corporate governance-related variables, we find that the

number of members on boards of directors ranges from 3 to 23 directors with
an average of 12. Half of the sample firms have 23 board members. We also
find that the proportion of independent directors is an average of 47.42% for
the whole sample, which is comparable to that reported in Zemzem and
Ftouhi (2013) (46.12%). We measure CEO compensation as of three
variables including salary, stock options and total compensation. Unlike

78

salary and total compensation, stock options differ widely, with a recorded
standard deviation of 2.86747.

In view of personal characteristics, the youngest individual CEO in our

sample is 34 years old and the oldest 81. More than half the CEOs are aged
57 years or more old and have held the CEO position for a median of 7years.
The result on the age of an individual CEO is comparable to that of prior
studies. Whether for CEO tenure, the results are consistent with that of Aliani
(2014).

Table 2 indicates that audit fees, calculated as the logarithm of total audit
fees in euro, range between 5.89 and 11.39. Half the sample has paid of
more than 8.75 in audit fees.

In terms of firm characteristics, the average company in this sample has total
assets of 22.45 and an average ROA ratio of 5.17% (median 4.66%), which
implies that our sample firms are profitable whereas less capital intensive as
the average net property, plant and equipment represents below 1% of total
assets, though there is a large disparity between firms in terms of the use of
tangible capital assets (maximum 41.62%). Likewise, the ratio of intangibles
to total assets is reduced with a mean value of about 0.27%.

In order to ensure the absence of multicollinearity among our independent

and control variables, we check, in Table 3 using Pearson pairwise
correlation matrix, for the existence of a strong correlation. The existence of a
strong correlation that, according to Kennedy (1985), exceeds the correlation
coefficient of 0.8 may bias our results and distort our estimates.

Preliminary analysis shows the existence of a strong correlation (0.9396)

between SALARY and TOTAL_COMP WKDW H[FHHGV WKH .HQQHG\¶V 
threshold.

To further verify the existence of the collinearity problem between both

independent variables, namely SALARY and TOTAL_COMP, we run the
Variance Inflation Factor test (VIF). Similarly, when the VIF of the explanatory
variable exceeds the rule of thumb threshold of 10 (Chatterjee and Hadi,
2006) thus, multicollinearity is considered as a serious problem. In doing so,
we find that the VIF of TOTAL_COMP is above 10 (10.96). Thus, one might

79

infer that the problem of multicollinearity seems critical in our case, and
thereafter, we remove SALARY and STOCK_OPT to perform our main
analysis with only TOTAL_COMP.

80

Table 3 Correlation Matrix

ROA

SALARY

CEO_DUA
CEO_ AGE
FIRM_ SIZE

STOCK_OPT

BOARD_ IND
AUDIT_FEES

BOARD_SIZE
CAPITAL_INT
INTANGIBLES

TOTAL_COMP
CEO_ TENURE
BOARD_SIZE 1.00
BOARD_IND -0.03 1.00
CEO_DUA 0.10 -0.08 1.00
SALARY 0.53 0.34 -0.09 1.00
STOCK_OPT 0.42 0.11 -0.07 0.64 1.00
TOTAL_COMP 0.52 0.34 -0.07 0.93 0.71 1.00
CEO_AGE 0.08 0.16 0.03 0.02 0.01 0.05 1.00
CEO_TENURE -0.25 0.05 -0.12 -0.20 -0.22 -0.22 0.30 1.00
AUDIT FEES 0.56 0.32 0.07 0.42 0.07 0.38 0.10 -0.18 1.00
FIRM_SIZE 0.75 0.22 0.01 0.64 0.56 0.62 0.09 -0.17 0.57 1.00
ROA -0.07 0.05 -0.27 0.06 0.08 0.05 -0.01 -0.05 -0.18 -0.06 1.00
CAPITAL_INT -0.24 0.08 0.11 -0.33 -0.61 -0.34 0.02 -0.01 0.31 -0.48 -0.10 1.00
INTANGIBLES 0.01 0.09 -0.31 0.23 0.13 0.22 -0.03 0.09 0.14 0.17 0.07 -0.13 1.00
Where: BOARD_SIZE: board size, measured by the total number of board members. BOARD_IND: board independence, measured by the number of independent
directors to total number of board members. SALARY: CEO salary, measured by the logarithm of annualized CEO salary in euro. STOCK_OPT: CEO stock option,
measured by the logarithm of CEO stock option in euro. TOTAL_COMP: CEO total compensation. CEO_AGE: CEO age, measured by the age of CEO in years.
CEO_TENURE: CEO tenure, measured by the number of years the CEO has been in office. AUDIT_FEES: audit fees, measured by the logarithm of total audit fees
in euro. FIRM_SIZE: firm size, measured by the logarithm of total assets. ROA: Return On Assets, a measure of firm performance, calculated as the ratio of net
book income to total assets. CAPITAL_INT: capital intensity, measured by the ratio of net property, plant and equipment to total assets. INTANGIBLES: intangibles,
measured by the ratio of intangible assets to total assets.

81

 II. Methodology and Empirical Results

This section elaborates on the approach followed to test our hypotheses. We

supplement the preliminary results of the univariate analysis running
multivariate regressions. In the following, we extend our findings to cover a
number of additional tests and robustness checks.

A. Baseline Model Specification

In order to test the impact of several governance factors and CEO

demographics as well as a set of firm characteristics as control variables on
corporate tax aggressiveness measured by the effective corporate tax rate,
an ordinary least squares (OLS) regression is used so as to estimate the
following multivariate model:

‫ܴܶܧ‬௜௧ ൌ  ߙ଴ ൅  ߙଵ ‫ܧܼܫ̴ܵܦܴܣܱܤ‬௜௧ ൅  ߙଶ ‫ܦܰܫ̴ܦܴܣܱܤ‬௜௧ ൅  ߙଷ ‫ܣܷܦ̴ܱܧܥ‬௜௧

൅  ߙସ ‫ܧܩܣ̴ܱܧܥ‬௜௧ ൅  ߙହ ‫ܧܴܷܰܧ̴ܱܶܧܥ‬௜௧ ൅  ߙ଺ ܱܶܶ‫ܲܯܱܥ̴ܮܣ‬௜௧
൅  ߙ଻ ‫ܵܧܧܨ̴ܶܫܦܷܣ‬௜௧ ൅  ߙ଼ ‫ܧܼܫ̴ܵܯܴܫܨ‬௜௧ ൅  ߙଽ ܴܱ‫ܣ‬௜௧
൅  ߙଵ଴ ‫ܵܧܮܤܫܩܰܣܶܰܫ‬௜௧ ൅ ߙଵଵ ‫ܶܰܫ̴ܮܣܶܫܲܣܥ‬௜௧ ൅  ‫ݑ‬௜௧

Where subscripts ݅ correspond to the firm and‫ ݐ‬denote the period of the
study. ETR is the measure of tax aggressiveness for each firm in period t.
BOARD_SIZE, BOARD_IND and CEO_DUA are the corporate governance
structure related variables. CEO_AGE, CEO_TENURE and TOTAL_COMP
account for CEO-specific variables. AUDIT_FEES is an additional
explanatory variable. The remaining four firm-specific variables, concerning
FIRM_SIZE, ROA, INTANGIBLES and CAPITAL_INT stand for control
variables. The parameters ߙ଴ ܽ݊݀ߙଵ ‫ߙ݋ݐ‬ଵଵ ܽ݊݀‫ݑ‬௜௧ are respectively the
intercept and the coefficients of independent and control variables and the
error term assumed to be independent and identically distributed (i.i.d).

At this juncture, it is noteworthy to specify that our data follows panel data set.
Panel data, also known as longitudinal data or cross-sectional time series
data in some special cases, is data that is derived from a (usually small)
number of observations over time on a (usually large) number of cross-

82

sectional units like individuals, households, firms, countries or governments.
Therefore, observations in panel data involve at least two dimensions: a
cross-sectional dimension, indicated by subscript௜ and a time series
dimension, indicated by subscript௧ .

An important characteristic of panel data is that we cannot assume that the

observations are independently distributed across time. Independently pooled
cross-section data are obtained by random sampling of individuals at different
points in time (e.g. yearly).

Panel data, by blending the inter-individual differences and intra-individual

dynamics have several advantages over cross-sectional or time-series data.
One primary advantage is that it accounts for individual heterogeneity. In
other words, it allows controlling unobservable individual effects or those
difficult to measure like cultural factors or difference in business practices
among firms. Controlling for unobserved heterogeneity is a fundamental
challenge in explicit tax planning research; many of the inherently
unobservable factors such as CEOs risk aversion, managerial ability, etc,
may deeply affect corporate policies. So that, failing to control for these
heterogeneities can cause serious identification challenges. Therefore,
applying a correct panel data specification can potentially eliminate bias and
improve efficiency.

B. Multivariate Analysis

Recalling that our research question aims to study the impact of the variables
of the corporate governance structure, CEO characteristics and
compensation, and audit fees on firm tax aggressiveness. For this, we
perform a linear panel regression.

The analysis of the econometric model has to pass first through some
preliminary tests that ensure the model specification.

Properly specifying a model is of paramount importance to ensure that the

model proposed does not suffer from misspecification problems and is the
adequate model to test our hypotheses.

83

1. Tests on Panel Data

In this section, we examine a battery of specification tests used in panel data

modeling to choose the best model specification. Specification tests involve
testing for individual effects and for correlation between these latter and the
regressors to select the best-fit model between fixed and random effects
models (Hausman test). Moreover, we carry out a suite of usual diagnostic
checks, including testing for autocorrelation and heteroscedasticity.

1.1. Testing Individual Effects

At the outset it is often useful to check is the homogeneous or heterogeneous

specification of the data generating process. That is, the specification tests
come down to determining whether one is entitled to assume that the
theoretical model studied is perfectly identical for all the companies, or on the
contrary if there are specificities specific to each company.

The test for individual effects contrasts the absence of individual/ unobserved
effects. Virtually, to check the existence of individual specific effects in our
sample of panel data, we look at the F-statistic in order to discriminate the
presence or absence of these effects, if we accept the null hypothesis of
homogeneity, that is there are no individual effects, we obtain a model of
pooled completely homogeneous. If we reject the null hypothesis, then we
must include the individual effects in the model and move to the second step.

In the present study, the F-statistic generates a p-value of less than 1% (p-
value = 0.000), which allows us to consider our model in a panel setting and
infer the presence of individual effects to each firm in our model.

1.2. +DXVPDQ¶VSpecification Test

The specification of the above model implies therefore that individual effects
describing corporate tax aggressiveness can be retained. One way to capture
these individual effects is to use a ³within´HVWLPDWRU(also known as the fixed
effects estimator) that takes into account the variations in each group.
Otherwise, we can also think of a random effects model in which individual

84

effects are modeled randomly and thus embodied in the error term alongside
the idiosyncratic error ߝ௜௧ as an individual error component assumed to be
uncorrelated with the explanatory variables included in the model as opposed
to a fixed effects model in which these unobserved individual-specific effects
are allowed to be correlated with the included regressors. When this
assumption is met, fixed effect estimation is deemed unbiased and
consistent; otherwise, if the individual effects and the explanatory variables
are independent, random effect estimation is preferable to fixed effect
estimation and is considered more efficient because it utilize both the within-
and between-group variation. Whereas, the fixed effect estimation is not
efficient because it only utilizes the within-group variation. While each
estimator (the random effect estimator and fixed effect estimator) controls for
otherwise unobserved individual effects that may potentially impact corporate
tax aggressiveness, both estimators require different assumptions.

To choose the best estimator of the suitable model specification, fixed versus
random effects estimators, we seek to check the correlation between the
individual effects and the explanatory variables. When the individual effects
are correlated with the explanatory variables i.e.‫ܸܱܥ‬ሺܺ௜௧ ǡ ߤ௜ ሻ ് Ͳ, the fixed
effects (within) model provides an unbiased estimator; otherwise a feasible
GLS in a random effects model is an efficient estimator.

The choice between fixed and random effects specifications is based on

Hausman test, which compares the two estimators, namely the GLS
estimator of the random effects model and the within estimator of the fixed
effects model, under the null hypothesis of no significant difference between
both estimators. If this hypothesis is accepted, then both estimators are
consistent and the random effects estimator is the more efficient. However, if
we reject the null hypothesis i.e. there exists a systematic difference in the
estimates, only the fixed effects estimator is consistent and the adequate
specification would be the fixed effects model.

Our result suggests in this respect the appropriateness of the specification

involving individual fixed effects with a p-value of the test of less than 1% (p-
value = 0.0002). So the fixed effect (within) estimator is the most operational
in our case.

85

1.3. Diagnostic Checks

After setting up the effect of the econometric model, we are interested in

verifying the absence of bias and problems that can affect the significance of
the coefficients of the variables. Among the potential problems that can arise
at the time of our estimations, we quote essentially the heteroscedasticity and
the autocorrelation.

Heteroscedasticity refers to data with inconsistent variance. It does not bias

the estimation of the coefficients, but the usual inferences are no longer valid
since the standard deviations found are not the accurate. Heteroscedasticity
is a situation frequently encountered in the panel data, so it is important to
detect and correct it.

To check for homoscedasticity we perform the Breusch-Pagan test, used to

test whether the estimated variance of the residuals from a regression are
dependent on the values of independent variables. The null hypothesis is that
all coefficients of the regression of squared residuals are equal to zero, in
other words, the variance of each individual error is constant. The alternate
hypothesis stipulates otherwise the heteroscedasticity. The statistics of the
test follows the chi square distribution. The p-value is less than the threshold
of 5% (the significance level), which leads us to reject the null hypothesis that
stipulates homoscedasticity and to conclude the heteroscedasticity of our
model.

A further issue concerns the serial correlation of the idiosyncratic error term is
assessed using the Wooldridge test which checks that the sum of the squares
of correlation coefficients between errors is approximately zero. In the context
of this test, the null hypothesis is the independence of residues between
individuals. The associated result confirms the alternate hypothesis of the
presence of autocorrelation at the level of 1%.

Just as in other studies (e.g. Dridi and Boubaker, 2015; Khaoula and Ali,
2012; Ribeiro, 2015), the results obtained have both heteroscedasticity and
autocorrelation.

86

2. Regression Results

To test what impact governance has on tax aggressiveness, we examine the

effective tax rate (ETR) in a multivariate analysis using a within estimator.
Table 4 displays the regression results for the ETR.

Results show that among board variables, board size and board
independence are significant. However, results show little support for CEO
duality.

The coefficient on board size is negative and significant at 1% level, implying

that the higher the number oIWKHERDUG¶VPHPEHUVWKHKLJKHU the level of tax
aggressiveness (as higher ETR reflects the less tax aggressiveness level).
This finding is consistent with the prediction according to which the smaller
corporate board is likely increases regulatory compliance and hence reduces
tax aggressiveness.

The results on board size are in line with those reported in the study of
Zemzem and Ftouhi (2013) in French context and contradictory to the
research of Richardson et al., (2011) in the Australian context.

Furthermore, board independence seems to have a significant positive

relationship with tax aggressiveness, contrary to what was expected. This
result might be because shareholders value tax aggressiveness.

The significant positive relationship found between more independent

directors and tax aggressiveness is coherent with the conclusions drawn by
3ăXQHVFXHWDO and Armstrong et al., (2015) in a U.S. context.

However, the regression results in this study provide little evidence for any
significant relationship between CEO duality and tax aggressiveness. One
possible explanation is that the CEO has not properly exploited his
experience and his very specific knowledge of tax matters within the
company. The lack of significance on CEO duality is consistent with the
research of Zemzem and Ftouhi (2013) in the French context.

Regarding the effect of CEO total compensation on ETR, this study strongly
supports and reveals that TOTAL_COMP does influence tax aggressiveness.

87

A significant positive relationship is observed between TOTAL_COMP and
tax aggressiveness, indicating that the higher the CEO compensation, the
higher the extent of corporate tax aggressiveness. This result can be
explained by the fact that CEOs with high compensation have incentives to
actively manipulate the FRPSDQ\¶VWD[DEOHLQFRPH It is further noted that this
result is consistent with prior research (Rego and Wilson, 2009).

Following Rego and Wilson (2009), we attribute the positive relation between
CEO total compensation and tax aggressiveness to these two alternate
explanations. The first assumes that this link could be reflected by the
opportunistic use of tax aggressiveness transactions by top executives to
extract rents from the firm. While the second advance the explanation of this
positive link mainly to optimal contracting.

It is noteworthy that CEO tenure and age do not seem to have any
significance for the explanation of tax aggressiveness. The non-validation of
the theoretical assumptions specified above does not mean that the CEO is
not involved in the tax aggressiveness strategy. The absence of an
observable effect between the effective tax rate and the variables related to
age and tenure can be explained by the CEO exemplarity (tone at the top).
The CEO is the example to follow in his firm; he transmits its know-how and
skills to his subordinates. The attitudes of tax administrators depend on the
reputation of the CEO and his network of relationships built throughout his
experience. We also find that the regression coefficient for audit fees is not
significant.

A simple examination of the different control variables reveals a significant

negative relationship between firm size and tax aggressiveness that is, as
company size increases, ETR does as well, consistent with the finding of
Rego, (2003). This result implies that large firms are less likely to conduct tax
aggressiveness. A reason for this could be that larger firms suffer greater
taxation because there is an association between firm size and political costs.
Larger firms are more likely than smaller firms to be subject to governmental
scrutiny, and hence, because they know this, large firms will be less likely to
aggressively manage their taxes (Zimmerman, 1983).

88

We find a lack of significance on the other control variables, suggesting that
the ROA, CAPITAL_INT and INTANGIBLES do not play as key a role in
determining tax aggressiveness contrary to what is originally anticipated.

Table 4 Regression Results

Corrected fixed effect
Fixed effect model
Variables model
Coefficient t p> |t| Coefficient t p>|t|
BOARD_SIZE -1.276164 -3.09 0.002 -1.647182 -3.51 0.001
BOARD_IND -4.035336 -0.62 0.536 -14.84629 -2.06 0.040
CEO_DUAL -2.287339 -0.96 0.340 -2.785511 -0.89 0.376
TOTAL_COMP -2.931643 -2.79 0.006 -3.198264 -3.07 0.002
CEO_AGE -0.087246 -0.76 0.448 0.172068 1.17 0.243
CEO_TENURE 0.238095 2.13 0.033 0.089794 0.66 0.508
AUDIT_FEES 2.651261 1.17 0.241 2.323686 0.95 0.343
FIRM_SIZE 0.799938 0.37 0.715 9.844729 3.07 0.002
ROA -0.289312 -2.19 0.029 -0.042615 -0.34 0.731
CAPITAL_INT 0.585095 1.38 0.169 0.577540 1.19 0.234
INTANGIBLES 14.72377 1.39 0.166 -2.209034 -0.18 0.854
CONSTANT 50.52616 1.16 0.247 -146.6117 -4.07 0.000
R-squared 8.18% 9.52%
Fisher test F(42,419) = 4.54
Hausman test X² (11) = 35.28
Breusch- X² (1) = 51.63
Pagan test
Wooldridge F(1,42) = 24.48
test
Notes: this table reports the results of the fixed effect model and the corrected fixed effect model for
heteroscedasticity and autocorrelation bias on the relation between the corporate effective tax rate (ETR)
and alternative sets of board and CEO variables and audit fees and control variables. ETR: Effective Tax
Rate, measured by the total tax expense scaled by pre-tax book income. BOARD_SIZE: board size,
measured by the total number of board members. BOARD_IND: board independence, measured by the
number of independent directors to total number of board members. SALARY: CEO salary, measured by the
logarithm of annualized CEO salary in euro. STOCK_OPT: CEO stock option, measured by the logarithm of
CEO stock option in euro. TOTAL_COMP: CEO total compensation. CEO_AGE: CEO age, measured by the
age of CEO in years. CEO_TENURE: CEO tenure, measured by the number of years the CEO has been in
office. AUDIT_FEES: audit fees, measured by the logarithm of total audit fees in euro. FIRM_SIZE: firm size,
measured by the logarithm of total assets. ROA: Return On Assets, a measure of firm performance,
calculated as the ratio of net book income to total assets. CAPITAL_INT: capital intensity, measured by the
ratio of net property, plant and equipment to total assets. INTANGIBLES: intangibles, measured by the ratio
of intangible assets to total assets.

89

3. Additional Tests and Robustness Checks

We perform some checks to assess the robustness of the results of our

baseline regression model. In the first set of tests, we include other board
characteristics in the baseline model and re-estimate the same extended
panel regression. In the second set of robustness tests, we deconstruct the
variable TOTAL_COMP into SALARY and STOCK_OPT to test whether CEO
compensation is being driven by salary or stock option.

Table 5 displays the results from robustness tests. Panel A presents the
results for the first set of robustness tests and Panel B presents the results for
the second set of robustness tests.

It is possible that other characteristics of corporate governance may help in

reducing tax aggressiveness. The perspective that board monitoring is a
function of not only the structure and composition of the board of directors but
DOVR RI WKH FRPSRVLWLRQ RI WKH ERDUG¶V VXEFRPPLWWHHV LV D UHODWLYHO\ UHFHQW
one. Indeed, through a review of some literature and the corporate
governance guidelines, compensation, audit and corporate governance
committees are well evidenced to greatly impact corporate activities. We thus
extend the scope of analysis to control for the following corporate governance
characteristics: the existence of a compensation committee (COMP_COMM)
and a corporate governance committee (CORP_GOV_COMM) within our
sample of firms.

The concept of independent functioning of the board and its special-focus

committees is endorsed by the French codes of corporate governance. The
independence of board committees are clear prerequisites for the efficient
functioning of the board of directors. Hence, we include two dummy variables
which are the independence of compensation committee
(COMP_COMM_IND) and audit committee independence
(AUDIT_COMM_IND).

Furthermore, we embed in the regression an additional variable to control for

board activity that is the number of board meetings per year
(NUM_BOARD_MEET).

90

Table 5Robustness Tests
Panel A
Corrected fixed effect model
Variables
Coefficient t p> |t|
BOARD_SIZE -1.632 -3.45 0.001
BOARD_IND -15.64963 -2.12 0.034
CEO_DUAL -2.327338 -0.73 0.467
TOTAL_COMP -3.191279 -3.05 0.002
CEO_AGE 0.180348 1.22 0.224
CEO_TENURE 0.092970 0.68 0.496
AUDIT_FEES 2.331919 0.94 0.349
FIRM_SIZE 9.912746 3.03 0.003
ROA -0.047502 -0.38 0.705
CAPITAL_INT 0.572333 1.18 0.240
INTANGIBLES -1.087074 -0.09 0.928
COMP_COMM_IND 0.046522 0.95 0.344
AUDIT_COMM_IND -0.025241 -0.61 0.540
CORP_GOV_COMM -1.178855 -0.37 0.710
NUM_BOARD_MEET -0.150864 -0.56 0.573
COMP_COMM -3.690412 -0.76 0.448
CONSTANT -145.6853 -3.97 0.000
R-squared 9.97%
Panel B
Corrected fixed effect model
Variables
Coefficient t p> |t|
BOARD_SIZE -1.643918 -3.50 0.001
BOARD_IND -13.86039 -1.92 0.056
CEO_DUAL -2.246133 -0.72 0.475
SALARY -3.071278 -2.69 0.007
STOCK_OPT -0.093614 -0.24 0.810
CEO_AGE 0.170599 1.16 0.246
CEO_TENURE 0.093239 0.69 0.492
AUDIT_FEES 2.54644 1.04 0.300
FIRM_SIZE 9.37842 2.94 0.003
ROA -0.047593 -0.38 0.702
CAPITAL_INT 0.578458 1.19 0.234
INTANGIBLES -2.144441 -0.18 0.859
CONSTANT -140.0128 -3.81 0.000
R-squared 9.50%

91

Specifically, we ran the same baseline regression model, including these
variables as additional controls for corporate tax aggressiveness to check
whether their inclusion in the regression disturb our preliminary findings.

After controlling for board committees and the number of board meetings,
variables show identical signs and similar levels of statistical significance to
those reported in Table 4.

In the second set of robustness tests, we intend to supersede TOTAL_COMP

with SALARY and STOCK_OPT and re-estimate our baseline model with
these components of total compensation as the independent variables. We
recognize that finding in the compensation for the CEO, could be driven by
either the salary or by stock option.

In Table 5 (Panel B), we report the results from tests of the multivariate
regression, including salary (SALARY) and stock option (STOCK_OPT)
variables instead of the variable of total compensation (TOTAL_COMP).

By using the decomposed total compensation within the structure of our

multivariate analysis, we can better understand how CEO pay interacts with
tax aggressiveness. Results from Table 5 (Panel B) indicate that ETR is
related to salary, but not related to stock option.

Conclusion

This study aims to shed lights on the effects of corporate governance and
CEO characteristics RQILUP¶Vtax aggressiveness level. Based on a sample of
43 French listed firms during the period 2005 to 2015, this research mainly
examine the effect of CEO characteristics and some corporate governance
mechanisms, namely CEO compensation, external audit and those related to
ERDUGV¶ features on tax aggressiveness. Empirical analyses are conducted
using an OLS regression. The study provides evidence on the role of board
size and independence and CEO compensation in shaping tax
aggressiveness. The results of the robustness tests presented in the last
subsection are consistent with our baseline model.

92

 Conclusion and Recommendations

Reviews are always requisite, in order to identify recent developments in

research, as well as unresolved issues. Although, the literature on tax
aggressiveness is a somewhat relatively young, it is very interesting and fast
burgeoning one. A review of the literature reveals, amongst others, the lack of
a full documentation on the determinants of corporate tax aggressiveness.
Why some corporations avoid more tax than others is still a question begging
for an answer.

Most research has been done on the subject have hitherto been largely
focused on the impact of various firm-specific characteristics such as
profitability, size, intangibles, leverage and capital intensity, with little interest
being given to the effect of corporate governance and CEO-related
characteristics such as compensation and demographic characteristics like
age and tenure.

Although a number of headways have been made in this field that have
increased our understanding of the effect of various firm characteristics, there
is still much that is unknown about the large discrepancy in tax
aggressiveness among firms, most notably the corporate governance and
CEO effects.

This review also reveals is that even with the modest achievement in the area
of corporate tax aggressiveness research, the bulk of the research tends to
be centered in the US. What is even more revealing is that not much has
been documented on European countries in spite of the emergence of
several and various laws and codes of corporate governance in France in
recent years.

This study brings each stratum of the above documented determinants

together and examines whether corporate governance and CEO attributes
affect tax aggressiveness in France.

This research began by defining the concept of tax aggressiveness followed

by a distinction of this concept from its closely related tax policy concepts. It
then focused on the major theories that have been put in place to study this

93

kind of tax risk, mainly agency theory, legitimacy and stakeholder theories
and upper echelons theory. This was followed by a brief review of the
literature and hypotheses statement. The study then moved onto the
empirical part. We presented in the first place, sample selection and data
sources. For this, we selected a sample of 43 French listed companies for the
period 2005-2015. We also defined the different variables and their
measurements, and we have performed the univariate analysis.

In the next section, we presented, first, the model to be tested, and then
conducted to the multivariate analysis. The results of our study allow us to
identify a significant and positive relationship between tax aggressiveness
and board size. Similarly, board independence has a significant and positive
effect on tax aggressiveness. As for CEO duality, the results show no
significant effect on tax aggressiveness. Using ETR as a measure of tax
aggressiveness, we note that companies that do not appear to set up
aggressive tax strategies are those with less independent directors in the
board of directors and embrace small-sized boards.

We also find that CEO compensation plays an important role in tax

aggressiveness. A significant positive relationship is observed between CEO
compensation and tax aggressiveness level, indicating that higher
compensation provides incentives for CEOs to commit to tax aggressiveness.

However, the regression results in our study provide little evidence for any
significant relationship between CEO characteristics (age and tenure) and tax
aggressiveness. None of these characteristics have a significant effect on the
effective tax rate. Therefore, the age and tenure of the CEO do not seem to
influence tax aggressiveness. The weak relationship between ETR and the
variables related to age and tenure does not deny the individual effect of the
CEO. The efficiency of the fiscal decisions taken within companies is
indirectly influenced by the CEO through his exemplary attitude and his style
which is the reflection of his personal attributes.

In addition, the study reveals no significant effect of audit fees on tax

aggressiveness.

94

Most importantly, empirical validation of our research show that the corporate
governance structure and CEO compensation has a great influence on tax
aggressiveness.

As for control variables, results show that firm size negatively and significantly
affect tax aggressiveness. So, the larger the firms are, the less they are tax-
liable. Consequently, they seem to undertake less tax minimizing activities. In
addition, as larger firms are usually associated with higher governmental
scrutiny, their CEOs tend to be less involved with such management
practices. Regarding the other control variables, namely profitability,
intangibles and capital intensity, they all exhibit an insignificant effect on tax
aggressiveness.

In answering our research question, we find that some corporate governance

mechanisms, specifically those related to the board of directors, that is board
size and independence affect tax aggressiveness. We also find that CEO
compensation positively affects corporate tax aggressiveness within French
companies. This research presents issues about relationships between
corporate governance, CEO compensation and tax aggressiveness in
France.

Thereby, it contributes to the existing literature since it examines the

relationship between the three mentioned notions within a French context
using recent data.

In this research, we expanded our understanding of the determinants of tax

aggressiveness by examining the link between some corporate governance
mechanisms, CEO characteristics and the level of corporate tax
aggressiveness. The findings of this study may provide useful insights to tax
researchers and standard setters interested in studying effective tax rates
and to their analysis of which factors can drive ETRs.

This study opens avenues for further study in the area of corporate
governance and tax aggressiveness. Future research could set to incorporate
some psychological specificities in their analysis of the individual effects of
CEOs on tax aggressiveness. Secondly, it might also be worth considering
further measures of tax aggressiveness such as cash effective tax rate and

95

book-tax differences measures. Another, improvement that can be made is
to shed light on further European countries and realize cross countries
comparison which would produce more generalizable results and allow for a
greater understanding of the differential factors at play.

96

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