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Borsa Istanbul Review xxx (xxxx) xxx
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Full Length Article

The moderating effect of the board of directors on firm value and tax
planning: Evidence from European listed firms
Ftouhi Khaoula a, Dabboussi Moez b,*
a
College of Community, Department of Administrative and Financial Sciences and Technology, Taibah University, Saudi Arabia
b
College of Business, Department of Finance and Investment, Jouf University, Saudi Arabia
Received 13 April 2018; revised 6 June 2019; accepted 13 July 2019
Available online ▪ ▪ ▪

Abstract

This study examines the moderating effect of the board of directors in the relationship between tax planning and firm value. Focusing on a
sample of 105 European firms during the period 2005e2012, we found a positive relationship between tax planning and firm value. In addition,
we found that board independence, board diversity, and CEO's dual functions have a significant and negative effect on the relationship between
tax planning and firm value. The paper makes two contributions. First, it gathers the first evidence on the shareholder valuation of Europeans
firms' tax planning practices and offers insights into corporate behavior. Second, the analysis examines an eight-year period considering the
sensitivity of the board of directors and attitudes to tax planning time.
_
Copyright © 2019, Borsa Istanbul Anonim Şirketi. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-
ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

JEL classification: G30; G32; H26; H32

Keywords: Board of directors; Corporate tax planning; Firm value; European firms

1. Introduction planning practices may be associated with increased oppor-

We examine the role of governance in the relationship
between tax planning and firm value to help resolve the debate
in the governance and tax literature about whether a link exists
between firms' corporate governance structures, including
characteristics of the board of directors, and corporate tax
planning. Indeed, tax planning carries significant costs for
firms and shareholders. Although tax reduction may entail an
increase in after-tax profits, real and potential costs inhibit
firms from maximizing their after-tax profits through tax
planning. However, non-tax costs may accumulate in the
presence of tax planning activities, in particular, those arising
from agency problems. Specifically, more aggressive tax
* Corresponding author. Jouf University, Sakaka 72388, Saudi Arabia.
E-mail address: dabboussi.moez@yahoo.fr (D. Moez).
_
Peer review under responsibility of Borsa Istanbul Anonim Şirketi.
tunities for rent diversion by the firm's managers. For instance,
Desai and Dharmapala (2006) argue that tax avoidance and
managerial rent extraction can be complementary if tax
avoidance reduces corporate transparency which, in turn, in-
creases the opportunity for managers to divert corporate re-
sources for personal benefit. Similarly, Lee and Swenson
(2012) find a negative relationship between effective tax
rates (ETR) and the share price because of the significant ef-
fects of a long-term sustainable reduction in ETR on market
capitalization and shareholder value. Additionally, Slemrod
(2004) suggests linking managers' compensation to desirable
outcomes such as ETR. Thus, corporate governance can affect
the relationship between tax planning and firm value. In
particular, internal governance considers the board of directors
the main vehicle of real control over management, through
rules that require the board to be dominated by outside di-
rectors. Therefore, the board becomes a key mechanism for

https://doi.org/10.1016/j.bir.2019.07.005
_
2214-8450/Copyright © 2019, Borsa Istanbul Anonim Şirketi. Production and hosting by Elsevier B.V. This is an open access article under the CC BY-NC-ND
license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
Please cite this article as: Khaoula, F., & Moez, D., The moderating effect of the board of directors on firm value and tax planning: Evidence from European
_
listed firms, Borsa Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.005
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F. Khaoula, D. Moez / Borsa Istanbul Review xxx (xxxx) xxx
monitoring managers' behavior and for advising them on how
to identify and implement strategies.
The previous literature identified a number of relationships
binding corporate governance and firm value. Without a doubt,
the link between corporate governance and tax risk is one of
the most important. However, so far, the extant literature has
not explored the potentially important effect of characteristics
of the board of directors on the relationship between corporate
tax planning and firm value in the European context. There-
fore, we aim to fill this gap in the literature by analyzing
whether the impact of tax planning on firm value depends on
the characteristics of the board of directors. The board of di-
rectors, which is responsible for allocating resources,
improving performance, and increasing shareholder wealth,
has a central role in choosing a tax-management strategy.
Thus, firms with different governance structures may pursue
different types of tax management (Abdul Wahab et al., 2017).
This link rests on the fundamental proposition that corporate
governance may discourage opportunistic behavior and
excessive tax risk-taking by managers. As taxation may
interact with various governance mechanisms, it can have an
effect on firm value. If shareholders and managers diverge on
the tax planning strategy, corporate governance may have an
effect on tax planning decisions. Hence, we predict that,
conditional on poor corporate governance, tax planning is
associated with decreased firm value. In the same context,
Desai and Dharmapala (2009) argue that when information
asymmetry is found in tax planning between managers and
shareholders, managers are motivated to act in their own in-
terest's resulting in a negative relationship between tax plan-
ning and firm value. Based on a sample of UK listed firms
from 2005 to 2007, Abdul Wahab and Holland (2012) reports
a negative relationship between tax planning and firm value.
Furthermore, the relationship remains robust when corporate
governance measures are included, which could be expected to
moderate the potential implications of tax-related
shareholderemanager information asymmetry.
We contribute to the literature in several ways. First, by
taking an agency perspective, our study complements the
recent literature on the role of corporate governance in
increasing firm value through tax avoidance (Desai and
Dharmapala, 2006, 2009; Minnick & Noga, 2010). Specif-
ically, we look at the effect of the board of directors as a
corporate governance mechanism on the relationship between
tax planning and corporate value to enhance our understanding
of business tax payer behavior. Second, we examine an eight-
year period including the time sensitivity of the composition
of the board of directors and attitudes toward tax planning. In
conclusion, we found a positive relationship between the level
of tax planning and firm value. This implies that tax planning
creates a “win-win” situation for managers and shareholders
(investors). Additionally, the theory thus articulates that the
positive association between tax planning and business per-
formance is based on the assumption that the benefits of tax
planning outweigh the fiscal cost. This also confirms Chen,
Chen, Cheng, and Shevlin (2010) who show that this posi-
tive association is explained by the fact that the cost and risk
Please cite this article as: Khaoula, F., & Moez, D., The moderating effect of the board of directors on firm value and tax planning: Evidence from European
_
listed firms, Borsa Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.005
of engaging in tax planning activities do not exceed the tax
savings that result from this practice. We also found that board
independence, board diversity, and the CEO's dual functions
have a significant and negative effect on the relationship be-
tween tax planning and firm value. These findings are
consistent with Desai and Dharmapala's (2009) agency view of
tax planning. The rest of this paper is structured as follows.
First, we review the relevant theory and develop our research
hypothesis. Then we discuss how we selected the sample and
describe the research design. Finally, we report the empirical
results and conclude the paper.
2. Literature review and research hypothesis
Tax planning is considered an important investment for
shareholders because of the reduction in the tax burden on
companies and shareholders. However, shareholders may not
wish to pursue the activities involved in tax planning because
of the potential costs (Chen et al., 2010). The prospect of an
adverse assessment may influence company directors in
making tax planning decisions, and similar risk concerns
may influence shareholders in valuing tax planning activities
(Abdul Wahab and Holland, 2012). Moreover, tax planning
can positively or negatively affect the value of the company.
If tax planning maximizes the value of shareholders, the
association is positive (Desai & Hines, 2002). Desai and
Hines (2002) report that a tightening of a tax system is
positively associated with higher market performance by
firms. In other words, when taxes are considered a burden on
society, shareholders assess tax planning positively; in
contrast, if tax planning is viewed as a risk-related activity
shareholder might respond negatively. Tax planning entails a
significant cost to the firm and shareholders, although, a tax
reduction can cause an increase in after-tax profits. Some
actual and potential costs can prevent firms from maximizing
after-tax profits through tax planning. However, non-tax
costs can be generated and accompanied by tax planning
activities, particularly those arising from agency problems.
Thus, the shareholders have to control the managers on de-
cisions related to finance. In fact, Lee and Swenson (2012)
provide evidence of a negative relationship between the
Effective Tax Rates (ETR) and the share price. In the same
context, the board of directors is an important element of
corporate governance structure. Given that the risks involved
in tax matters have become more diverse, boards of directors
should, as part of their risk management strategy, become
more involved in their firm's politics and tax planning stra-
tegies. They have to develop guidance in order to balance the
often-contradictory objectives of minimizing tax, managing
risk, and certainty in reporting earnings. The presence of an
effective board, which can supervise policy planning and
implementation, becomes even more important to the com-
pany (Erle, 2008).
After the Sarbanes-Oxley Act passed in 2002 took effect
and an alarming number of tax-related inaccuracies emerged,
many boards became aware that they can further monitor the
key areas of risk management, ensuring that tax functions
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F. Khaoula, D. Moez / Borsa Istanbul Review xxx (xxxx) xxx
properly and that important tax positions are aligned with the
firm's overall risk tolerance level. The board of directors is
ultimately responsible for tax policy and in charge of serving
shareholder interests (Erle, 2008).
Previous research supports the importance of some board
characteristics to corporate governance. According to Jensen
(1993), the board should include a higher proportion of in-
dependent directors. Because it better serves shareholder in-
terests, the question of how corporate governance may affect
firm behavior and performance remains a fundamental issue in
the literature on corporate governance. However, previous
research has paid little attention to the effect of tax planning
on variations in performance.
2.1. The impact of board size on the relationship
between tax planning and firm value
In France, Act No. 2001-420, related to “economic regu-
lations"- and promulgated, on May 15, 2001, stipulates that the
board of directors may include from three to eighteen mem-
bers. According to Jensen (1993), a large Board cannot
discipline managers and therefore cannot protect shareholder
interests. In that case, a small board will be more effective.
Studying the effectiveness of the size of the board of di-
rectors, earlier studies found conflicting results on the rela-
tionship between Board size and firm value (Brick, Palmon, &
Wald, 2006). Florackis (2008) shows that board size can be
negatively related to firm performance because of coordina-
tion, communication, and decision-making difficulties. Simi-
larly, de Andres, Azofra, and Lopez (2005) find a negative
relationship between board size and firm value in a sample of
member countries of the Organization for Economic Cooper-
ation and Development. Indeed, when the board is large, the
CEO must dominate it. Examining a sample of large U.S.
industrial corporations, Yermack (1996) also finds a negative
and statistically significant relationship between board size
and firm performance. Therefore, a small board improves the
quality of activities as well as overall performance.
In contrast to these studies, Zahra and Pearce (1989) find a
positive relationship between board size and firm performance.
They show that a large board encompasses different back-
grounds and, academic, and professional skills. Similarly,
Barnhart and Rosenstein (2005) show that large boards offer
different opinions that can enrich debates. They increase di-
versity in terms of professional experience, origins, gender,
and nationality. In the same vein, the board of directors should
make as many decisions as possible to take advantage of the
diversity of the skills and experience of its members. Then,
because of their expertise, a large management board uses that
variety of perspectives to improve corporate decisions. It has
more opportunity to obtain resources and establish a favorable
corporate image because of the ability to choose among the
many opportunities offered by the business environment.
Therefore, having directors with different experiences creates
the potential for corporate networking and contributes to a
positive effect on the corporate image. As a consequence, this
assumes that, with sufficient knowledge and expertise, the
Please cite this article as: Khaoula, F., & Moez, D., The moderating effect of the board of directors on firm value and tax planning: Evidence from European
_
listed firms, Borsa Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.005
3
board can monitor managers' tax planning. Large boards have
performance benefits, but some authors insist that small ones
are better. In fact, a small board promotes a more coherent
discussion, because communication within a small group is
usually easier and takes less time, and therefore it is more
efficient (Jensen, 1993). Similarly, Beasley (1996) indicates
that the probability of fraudulent financial statements de-
creases when boards are small. Therefore, it is reasonable to
assume that a smaller board of directors decreases the poten-
tial for possibility of corporate tax aggressiveness. To this end,
we expect that large boards tend to neglect taxes as company
value drivers. When directors with tax expertise (which is rare)
see taxes as potential drivers of firm value, their influence on
the board of directors is diluted by a larger board size. This
discussion leads to our first hypothesis:
Hypothesis 1. Board size has a negative effect on the rela-
tionship between tax planning and firm value.
2.2. The moderating effect of board independence on the
relationship between tax planning and firm value
The Bouton report (2002) states that qualifying directors as
independent does imply a value judgment. It qualifies a di-
rector who is deemed not to have potential conflicts of interest
with the company.1 The report also admits the importance of
two dimensions of board members, competence, and inde-
pendence: “a Board should also be a mix of expertise and
independence to serve the interest of the company and its
shareholders. We insist on competence and experience because
they are the defining qualities of administrators. They need to
master the strategic challenges of markets where the company
operates, which means they really know its businesses”.
Another definition is proposed in the second Vienot report
1999. p6: “a Director is independent when he has no rela-
tionship of any kind with the company, its group or its man-
agement, which could jeopardize the exercise of his freedom
of judgment.” Thus, according to these definitions, indepen-
dent directors can be considered mediators between internal
managers and shareholders. The appointment to the board of a
higher percentage of independent directors should increase
efficiency and therefore improve corporate compliance.
The literature suggests that board independence is the most
important mechanism of governance, which affects firm per-
formance (Adams, Hermalin, & Weisbach, 2010). An inde-
pendent board can protect shareholders interests and improve
firm value by monitoring senior management and advising
managers on the design and execution of the firm's strategies.
Yermack (1996) and Jensen (1993) show that boards with
more independent directors can improve firm performance and
therefore shareholder wealth. In fact, independent directors are
1
For clarification purposes, six criteria are proposed in the Bouton report
(2002, 10), which should be considered when qualifying a director as
independent.
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F. Khaoula, D. Moez / Borsa Istanbul Review xxx (xxxx) xxx
considered the best positioned to control managers. They are
likely to protect shareholder interests. Masulis and Mobbs
(2011) prove that outside directors are positively related to
operational performance. Additionally, boards with a higher
proportion of independent directors should encourage higher
levels of transparency in companies. Appointing a higher
proportion of independent directors to the board should in-
crease its efficiency in managing and improving the firm's
level of oversight (Adams & Ferreira, 2007). In the same way,
outside directors are more likely to oppose a narrow definition
of firm performance that focuses mainly on financial measures
and is more sensitive to the firm's needs than inside directors.
The added value that outside directors bring can be better
appreciated by monitoring competition among senior execu-
tives of the company. Boards usually include several outside
members who act as mediators in case of disagreement be-
tween internal managers and sanction decisions that involve
major agency problems (Fama and Jensen, 1983; Lanis &
Richardson, 2011). Appointing a higher proportion of
outside directors to the board should increase its efficiency in
managing tax risk and therefore improving corporate
compliance. Therefore, the independence of board members
may positively affect the relationship between firm value and
tax planning (Armstrong, Blouin, & Larcker, 2012).
In contrast to these studies, tax planning (TP) may also
carry a lot of risks, especially when tax authorities see a tax
planning practice as tax evasion (TE). The line between TP
and TE is often very thin, and this carries significant risks for
the company which may trigger scandals to which public
opinion is very sensitive. Therefore, independent directors are
more likely to avoid TP practices, because, as they are not
linked to the company; they value their prestige more than the
potential and risky gains from TP activities. Therefore, the
value-driver effect of TP diminishes when the number of in-
dependent directors is higher. Based on this, we formulate the
following hypothesis:
Hypothesis 2. An increase in the number of independent
board members positively (negatively) affects the relationship
between tax planning and firm value.
2.3. The moderating effect of dual CEO functions on the
relationship between tax planning and firm value
Dual functions occur when the same person acts as
chairman and CEO. Holding dual functions can create strong
power and strong leadership, which may adversely affect
efficient control of the board. However, it allows the chairman
of the board to act quickly and make decisions due to having
better knowledge of the company, (Brickley, Coles, & Jarrell,
1997). The literature on the relationship between dual func-
tions and firm performance has contradictory results. We
distinguish two conflicting points of views. When the CEO of
a company is also the chairman of the board, administrators
have opposing objectives. Proponents of agency theory argue
that dual functions encourage entrenchment by potential
Please cite this article as: Khaoula, F., & Moez, D., The moderating effect of the board of directors on firm value and tax planning: Evidence from European
_
listed firms, Borsa Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.005
managers. For example, Klein (2002) finds that dual functions
have a negative effect on firm performance. Rashid (2010)
asserts that CEO duality and firm performance are contin-
gent; the leadership structure is beneficial in some situations
supporting the stewardship theory but not in other situations,
supporting the agency theory. Indeed, managers'private in-
terests are likely to have an impact on the extent to which they
engage in activities at the expense of shareholders. In this
scenario, managers are willing to engage in tax avoidance
activities only to take advantage of enlarged discretion and
thus to divert shareholder wealth for their own benefit, which
reduces firm value, (Desai and Dharmapala, (2006). In the
same context, Minnick and Noga (2010) indicate that firms
with dual functions are characterized by a low level of tax
management and a high tax burden. This could increase firms
‘tax liabilities and thus lower future cash flows to investors and
firm value. The studies that support dual functions assume that
a company headed by one person at a time avoids coordination
problems; whereas supporters of separate functions, justify
their position by saying that a company led by a single person
encourages opportunistic behavior that will have a detrimental
effect on firm value. We take the position that the effect of
taxes on firm value is more favorable for companies that do
not have dual functions. Therefore, we formulate the following
hypothesis:
Hypothesis 3. The dual functions structure has a negative
effect on the relationship between tax planning and firm value.
2.4. The moderating effect of board diversity on the
relationship between tax planning and firm value
Walt and Ingley (2003) define board diversity as a combi-
nation of different qualities, characteristics and expertise of
individual members in decision-making and other board pro-
cesses. The Higgs report in the United Kingdom argues that
diversity improves board efficiency and specifically recom-
mends that companies may benefit from including women on
the board. Increasing the number of female board members
closely reflects the strong awareness of shareholders and of-
ficers of the importance of diversity. Diversity at companies
offers benefits and additional knowledge, new ideas that help
in solving problems, improving strategic planning, and new
opinions and experience.
The differences between men and women in making
financial decisions increasingly attract researcher interest.
Women are considered greater risk-takers, particularly in some
economic areas, and are less likely than men to engage in
behavior that is counter to business ethics. Board diversity
currently is one of the most important issues in corporate
governance. The representation of women at the decision-
making level is the subject of special attention from the gov-
ernment. Gender diversity on boards can lead to better firm
performance. Erhardt, Werbel, and Shrader (2003) find a
positive and significant relationship between the proportion of
women and the return on assets in corporate America. Adams
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and Ferreira (2009) suggest that women are better able to
scrutinize managers' actions and reports.
Supporters suggest that greater diversity can enhance the
competitive advantage of a company in a number of ways,
including cost savings (Cox & Blake, 1991; Orlando (2017);
Robinson & Dechant, 1997). In addition, a more diverse board
can inspire and unify the company. Specifically, diversity
improves communication and understanding between board
members.
The presence of female administrators might help the board
accomplish its strategic goals; and increase their expertise and
therefore improve firm value. Advice diversity leads to expe-
rience and value. Kastlunger, Dressler, Kirchler, Mittone, and
Voracek (2010) show the relevance of women's values during
the processing of tax issues. They argue that corporate
assessment and tax regulations differ according to gender.
Their results highlight the importance of female human capital
as a strategic asset and reflect the value of the people in the
company and their role in obtaining a competitive advantage.
As a result, female values can add value not only through the
implementation of certain human resource management
practices but also by maintaining a cultural mix.
A greater degree of diversity can serve as a positive signal
to potential job applicants, thus attracting more qualified
people outside the circles from which candidates are usually
recruited. Board diversity may also increase competition in the
market because women know that they are not excluded from
available positions requiring skills and qualifications. Board
diversity may also serve as a positive signal for the environ-
ment or the stakeholders to improve its reputation. In line with
the previous literature, we confirm that women show higher
levels of tax compliance, while men reveal higher levels of tax
aggressiveness. Accordingly, we confirm that the effect of tax
planning on firm value is more favorable at companies with
diverse boards, thereby allowing improved firm performance.
In addition, diversity strengthens the mission of control
assigned to the board and, as a result, reduces control costs
(Walsh & Seward, 1990), because female directors are inde-
pendent in most cases. In addition, women are better able to
serve on various subcommittees (audit, nomination, and
remuneration committees) than men to ensure better protec-
tion of shareholder interests through strengthening control
mechanisms (Kesner, 2017). Based on these arguments, we
assume that:
Hypothesis 4. Board gender diversity has a positive effect on
the relationship between tax planning and firm value.
2.5. The moderating effect of the audit committee on the
relationship between tax planning and firm value
The Audit Committee can play an important role in
improving manager accountability. According to the Sarbanes-
Oxley Act, Audit Committees can better ensure the quality of
information. From an perspective, the presence of independent
directors and financial experts on the audit committee
Please cite this article as: Khaoula, F., & Moez, D., The moderating effect of the board of directors on firm value and tax planning: Evidence from European
_
listed firms, Borsa Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.005
5
substantially improves the committee's efficiency in moni-
toring and controlling financial information and external au-
dits. The independent directors and financial experts are
supposed to be high caliber personnel with strong incentives to
monitor financial reporting (Klein, 2002). Furthermore, the
role of the Audit Committee is to ensure that shareholder in-
terests are properly protected against financial information.
One of the main tasks of the Audit Committee is to monitor
and ensure the objectivity and independence of external au-
ditors, in order to alleviate management pressures on accounts
and improve the transparency of financial statements (Beasley,
Carcello, Hermanson, & Neal, 2010). In addition, Yang and
Krishnan (2005) show that Audit Committee size negatively
correlates with earnings management, which implies that an
Audit Committee with the minimum number of members may
be relevant to financial information quality. Indeed, when the
Audit Committee is large, control and accounting processes
and financial monitoring functions increase. Similarly,
Anderson, Mansi, and Reeb (2004) found that large commit-
tees are likely to protect and control the accounting and
financial processes by providing greater transparency in
financial reporting. Therefore, a very large Audit Committee
may greatly diffuse responsibilities.
Complex and risky tax planning is a source of management
opportunism. Audit Committee members are the only ones
able to identify and evaluate risky tax strategies. In addition,
these directors are likely to focus on aggressive tax planning
which can affect their professional reputation. Audit Com-
mittee members are expected to solve problems related to the
complexity of financial information, the assessment of sub-
jective accounting policies, understanding auditors’-decisions,
and the quality of financial reports. In the United States, for
example, Dhaliwal, Naiker, and Navissi (2010) find a negative
relationship between the presence of fully independent Audit
Committees and accounting fraud. According to the Sarbanes-
Oxley Act (SOX), section 407: “all companies shall disclose in
their annual reports if there is at least one financial expert on
their Committee». The expertise of the Audit Committee is
associated with improving earnings quality and more conser-
vative financial information. Carcello and Neal (2003)
examine whether independent audits can exercise power over
management and help auditors to resist pressure from man-
agement. The authors indicate that when the proportion of
independent Audit Committees is greater, they are more
effective in monitoring management.
The audit committee is an important monitoring mecha-
nism. It is generally responsible for monitoring and disclosing
financial information, including oversight of financial report-
ing and the disclosure of accounting information and
following on policy choices and accounting principles. The
Audit Committee also examines regulatory policies and risk
management compliance with management practices.
Robinson, Xue, and Zhang (2012) show that companies with
high-level audit committees are associated with high level of
tax planning (the audit committee plays a role as both adviser
and controller of tax planning activities). They also point to
the importance of the role of the Audit Committee in reducing
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F. Khaoula, D. Moez / Borsa Istanbul Review xxx (xxxx) xxx
aggressive tax planning risk, McGuire, Omer, and Wang
(2012) indicate that companies with highly expert indepen-
dent audit committees engage in more tax planning. In addi-
tion, tax planning services provided by the audit committee
may have a positive effect on firm value if investors perceive
that tax planning is effective (the benefits of tax savings
outweigh the potential costs of these tax strategies.) and have
no negative effect on financial transparency. Therefore, this
can increase the firm value.
Sox Article 202 requires Audit Committees to assess
carefully whether tax services are performed by independent
auditors. These arguments suggest that tax services may lead
to more effective tax strategies that serve shareholder interests.
If services provided by the Audit Committee are not in line
with tax compliance, tax planning does not favor shareholders.
In addition, a 2003 report on Enron by US Congress the Joint
Committee on Taxation, in 2003, identified more than a dozen
complex transactions that had no commercial purpose, other
than to increase profits and reduce taxes. The Internal Revenue
Service investigated auditing firms, mainly Arthur Andersen,
BDO, Ernst & Young, and KPMG which provided their clients
with tax services. The main consequences of these services are
increased costs of penalties and sanctions.
The ability of independent experts on the Audit Committee
to effectively use tax planning services and shape tax strate-
gies is confirmed by research indicating that experts on the
committee are for their high-quality financial information
(Dhaliwal et al., 2010). Dhaliwal et al. (2010) show that the
audit committee can help their businesses to achieve signifi-
cant tax savings through optimal tax strategies by simulta-
neously trying to minimize pension management.
In conclusion, tax planning services provided by the audit
committee depend on the perception of risk associated with
this market strategy. In other words, if investors perceive tax
planning services provided by the Audit Committee as legit-
imate and not undermining firm transparency (on the one
hand, facilitating tax planning and, on the other, mitigating
aggressive tax planning), firm value can increase. Conversely,
if these services are meant to create opportunistic management
behavior, then they may adversely affect firm value. This
discussion leads to our last hypothesis:
Hypothesis 5. Audit committee size has a positive (negative)
effect on the relationship between tax planning and firm value.
3. Data, variables, models, and empirical methodology
3.1. Data
Our sample consists of all firms listed on the EURONEXT
100 and NEXT 150 index during the period 2005 to 2012. To
collect data on financial and governance variables, we used
annual reports of companies, available on the French Financial
Markets Authority website and some information received by
e-mail. After excluding 28 financial firms, we used further
filters to exclude firms with negative tax charge, insufficient
Please cite this article as: Khaoula, F., & Moez, D., The moderating effect of the board of directors on firm value and tax planning: Evidence from European
_
listed firms, Borsa Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.005
data, and extreme ETRs. Table S1 (available online) presents
the sample selection process, which resulted in 105 firms in
four countries, yielding a balanced panel of 840 year end
observations over the eight-year period.
3.2. Variables measurement
3.2.1. Dependent variable
Firm value is measured by Tobin's Q, which is defined as
the market capitalization scaled by total assets. We use Tobin's
Q as a proxy for firm value, a measure often used in studies on
tax evasion (Wang, 2011) and in other studies, such as Dey
(2008), who studies the impact of agency conflicts on firm
value. It is considered a good indicator that reflects growth
opportunities and long-term financial performance. The reason
it can be used as a proxy for firm value is that it can be
regarded as the amount of existing value (in monetary units).
Tobin's Q is a better measure than accounting returns and
minimizes distortions due to tax laws and accounting policies.
In addition, this measure is chosen because it reflects total firm
value, including debt. It is appropriate for assessing tax
planning under agency practices. Our study follows this stream
of research by integrating the concept of tax planning. Desai
and Dharmapala (2009) also use Tobin's Q and find that the
relationship between BTDs (differences between accounting
profits and taxable profits) and firm value is positive but not
significant. Subsequently, they show that the effect of this
relationship is a function of corporate governance. Dhaliwal,
Huang, Moser, and Pereira (2011) examine how tax evasion
affects firm value using four tax avoidance measures (BTDs,
permanent BTDs, permanent discretionary BTDS and the
effective cash tax rate). They show that tax evasion correlates
with negative excess returns both directly (principal) and
indirectly (interaction of tax evasion with change in stocks).
More recently, Inger (2014) explores investor perceptions of
different tax evasion methods. Inger finds that firm value
(measured by Tobin's Q) increases with tax deductions from
stock options, but is not affected by accelerated depreciation in
tax deductions and decreases in taxes on foreign earnings.
Therefore, we can connect the ETRs, using the notion of the
tax effects on Tobin's q. For that reason, Tobin's q plays an
important role in explaining the discrepancy between ETRs
(Iwamoto, 1992).
3.2.2. Independent variables
3.2.2.1. Tax planning. According to Lazar (2014), the litera-
ture on effective corporate taxation has two approaches. The
first approach is forward-looking in measuring the corporate
tax burden. Devereux and Griffith (2003) use hypothetical
investment projects as a methodology in this approach. The
second, more retrospective approach focuses on the determi-
nation of ETRs from firm financial data. In this context, we
find several heterogeneous ratios that measure ETR, which
differ in their denominators. Previous studies use several
measures of tax planning in the second approach. The ETR is
measured by the relationship between tax expenses and
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before-tax profit (Chen et al., 2010; Robinson, Kises, &
Weaver, 2010; Wilson, 2009), tax savings (Rego, 2003;
Slemrod, 2004), and aggressive tax returns (Wilson, 2009),
which are defined as a downward handling of taxable profit
using tax-planning activities. Another measure, used by Lanis
and Richardson (2011, 2016) is based on tax disputes. This
variable is a direct measure of tax evasion. Indeed, according
to them, a conflict with the tax authorities on tax issues is a
sign of tax evasion. These studies use as a dependent variable a
dichotomous variable that takes a value of 1 if the company
suffers tax adjustments and 0 otherwise. Other research uses
BTDS as a measure of tax planning (Graham, Raedy, &
Shackelford, 2012; Mills, 1998). Armstrong et al. (2012)
find that this gap allows better understanding of tax planning
by measuring activities that reduce before-tax profits. Finally,
we find that forward-looking ETR, captures the features of
both forward-looking and backward-looking ETR (Egger
et al., 2009). We use the backward-looking approach and
retain the ETR as a measure of tax planning. In general, the
ETR refers to total tax expense scaled by pretax income (Chen
et al, 2010). This ratio allows us to measure the degree of risk
as well as the quality of the tax strategy adopted. The ETR is
chosen as a measure of tax planning for different reasons.
First, it briefly summarizes the cumulative effects of various
tax incentives, and then it identifies neutrality in the tax system
toward companies with different tax burdens. The inequality
of the tax system as a result of the unfair provision of tax
incentives can be explained by the ETR in order to identify the
tax burden and the type of companies that face these burdens.
Second, several recent studies found that the ETR reflects
aggressive tax planning (Robinson et al., 2010; Taylor and
Richardson, 2014). Third, the ETR is also a measure of tax
aggressiveness, frequently used by academic researchers
(Dyreng, Hanlon, & Maydew, 2008). By contrast, Buijink,
Janssen, and Schols (2002) highlighted the effect of tax in-
centives on the gap between the real tax rate and the statutory
tax rate (tax rate that companies are supposed to pay). Ac-
cording to these authors, a large gap between the two rates
reflects major tax incentives granted by the government to a
particular industry, which then leads to more injustice in the
tax system. Similarly, the ETR is preferable, because it allows
us to measure the distribution of the tax burden through tax
incentives. Liu and Cao (2007) also discuss this ratio, as it
measures the tax burden as a whole for businesses, rather than
the marginal tax rate meant only for specific projects.
3.2.2.2. Board size. Board size is measured by the number of
directors on the board. This measure reflects the control
exercised by board members over managers. Minnick and
Noga (2010) indicate that small boards strengthen tax man-
agement. Later, Lanis and Richardson (2011) include this
variable in their study on the effect of the board on tax
aggressiveness. Their results confirm that board size has a
significant impact on tax-planning practices.
3.2.2.3. Presence of independent directors. Outside directors
are traditionally defined as all non-employee directors.
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_
listed firms, Borsa Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.005
7
However, it is also possible to distinguish between outside
independent directors and gray administrators. Outside inde-
pendent directors who have no connection to the firm, whereas
gray administrators are outside directors who have some
affiliation with the firm (Beasley, 1996). To measure the de-
gree of independence, we follow the listing standards of the
NASDAQ and NYSE governance by excluding the grey di-
rectors as independent directors. Consequently, board inde-
pendence is measured by the percentage of independent
directors on the board.
3.2.2.4. Board diversity. Previous studies use several measures
of Board diversity. One is a dummy variable equaling to unity
if a company has a woman director, Nguyen and Faff (2006).
Another measure, used by Bear, Rahman, and Post (2010) is
based on the Blau-index. This index measures how evenly
distributed men and women are in the board of directors. In
our study, diversity is measured by the percentage of female
members of the board, Walsh and Seward (1990).
3.2.2.5. Dual functions. A dual function as chairman and the
CEO is a dichotomous variable that takes a value of 1 if the
president of the board is, at the same time, the general man-
ager and 0 otherwise. Minnick and Noga (2010) are the first to
use this variable to study tax management at American com-
panies. They predict that a manager who chairs the board is
unmotivated to manage tax activities. They show the insigni-
ficance of this variable.
3.2.2.6. Audit committee size. As a general rule, Audit com-
mittee size depends on firm size and other relevant factors
associated with the firm. The Securities and Exchange
Commission (1999) requires that Audit Committees consist
of at least four directors. In our study, this variable is measured
by the Total number of directors on the audit committee.
3.2.3. Control variables
Our study includes several control variables, such as firm
size, dividends, return on assets, firm growth, and inflation
rate. There are two different points of view on the issue of firm
size. The first view considers firm size a proxy for the firm's
political costs. By examining the relationship between firm
size and tax rates, Zimmerman (1983) shows that the ETR is a
component of political costs. By examining the association
between tax-related political costs and firm size, he finds that
the 50 largest firms in his sample, in each year, were more
likely to have higher tax rates than other firms. In the same
vein, Wang (1991) investigates the relation between firm size
and corporate tax burdens on a yearly and industry basis. He
suggests that the associations between size and the five ETR
measures are consistent with Zimmerman's results. The second
view is that large firms pay less tax because they can allocate
more resources to tax planning and political lobbying. Rego
(2003) observes that larger firms can achieve economies of
scale via tax planning and have the resources and the in-
centives to decrease group tax. Size is measured as the natural
log of total assets. Hanlon and Slemrod (2009) find that large
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companies have larger gaps in their actual tax liabilities.
Additionally, dividends (DIV) are also included as a control
variable. It is an important tool for influencing shareholders'
assessment of managers' performance in the presence of in-
formation asymmetry. The dividend policy is relevant for
managers who have to allocate sufficient time to the design of
a dividend policy that will improve business performance and
shareholder value. Benefits in terms of dividends are a good
sign of a company's real revenues. In other words, an increase
in dividends tends to generate significant benefits in the future.
Therefore, future earnings growth correlates with a strong
distribution of dividends. In our study, we measure dividends
by the ratio of dividends per share and earnings per share
multiplied by 100 (Rees, 1997). Next, we integrate the return
on assets (ROA) into our study to monitor the operational
performance of the company (Gupta & Newberry, 1997). This
variable is measured as the ratio of pretax profit and total
assets. This ratio is the most used to integrate accounting-
based performance as a proxy for firm performance (Lam &
Lee, 2008). It is thus important to improve firm performance
and to create strategies, techniques, and tools that are appro-
priate and adapted to the company. It is considered an indi-
cator of the success of the company. As a result, it is a
reference for investors in their investment decision-making.
Thus, investors can assess firm performance through its in-
vestment policy.
Because Tobin's Q captures growth opportunities, we
include average revenue growth as a measure of firm growth.
Turnover growth measures whether resources are used effi-
ciently. Investor expectations of firm growth refer to the share
price; the higher the growth prospects, the higher the firm
value. We also use the inflation rate as a control variable,
because inflation is a factor that affects a country's account-
ing system. The inflation rate is significant in inflation ac-
counting. Countries with a high inflation rate fix prices, rather
than using the historical cost with some adjustment, because
the historical cost overestimates profitability during a period
of rising prices and reduces the value of the company's
financial resources. Additionally, Kirkulak and Balsari
(2009) show that inflation adjustments significantly affect
financial ratios and create different assessments of company
risk. In addition, their findings suggest that historical costs
and inflation-adjusted data on earnings and book value are
relevant values. In the same vein, the continuous decrease in
inflation since the 2008 financial crisis tended to slow eco-
nomic growth in European countries. Therefore, the banks
had less borrowing capacity, which reduced debt levels and,
consequently, firm value. In this context, the inflation rate
clarifies the effects of a contractionary monetary policy on
firm value. Table 1 summarizes the definitions of the
variables.
3.3. Model specification and estimation methodology
The model is estimated using the panel method. Hetero-
skedasticity and autocorrelation are two common problems
that normally exist in panel data analysis. Thus, we use the
Please cite this article as: Khaoula, F., & Moez, D., The moderating effect of the board of directors on firm value and tax planning: Evidence from European
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listed firms, Borsa Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.005
Breush-Pagan-Godfrey test, the modified Wald test, and the
Wooldridge test to identify these problems respectively. Then,
these problems are then resolved using GLS estimation. Our
variables do not follow a normal distribution. The variables
that have undergone logarithmic transformation are Tobin's Q,
DIV, and ROA. Thus, a logarithmic transformation applied to
these variables reduces asymmetry and brings the data closer
to a normal distribution before our model is estimated. The
logarithmic transformation reduces the influence of extreme
observations. The first empirical model to be tested is as
follows:
LogTobin's Qit ¼ b0 þ b1 ETRit þ b2 BSIZEit þ b3 BINDPit
þ В4 DUALit þ b5B DIVRit þ b6 ACit
ð1Þ
þ b7 GROWTHit þ b8 LogDIVit þ b9 SIZEit
þ b10 INFLit þ b11 LogROAit þ εit
To identify board characteristics that can influence the
relationship between firm value and tax planning, the second
model tests the moderating effect on that relationship. As a
result, this model includes the moderator ETR* Board of di-
rectors. (For a brief review of the literature, see the Supple-
mentary Appendix, available online.).
Model 2 includes all interaction variables, as follows:
LogQ Tobinit ¼ b0 þ b1 ETRit þ b2 BSIZEit þ b3 BINDPit
þ В4 DUALit þ b5 DIVRit þ b6 ACit
þ b7 BSIZEit ETRit þ b8 BINDPit ETRit
þ В9 DUALit ETRit þ b10 DIVRit *ETRit ð2Þ
þ b11 ACit ETRit þ b12 GROWTHit
þ b13 LogDIVit þ b14 SIZEit þ b15 INFLit
þ b16 LogROAit þ εit
4. Results and discussions
4.1. Descriptive statistics
The descriptive results (see Table S2, available online)
show that the average ETR is 28% during the period studied.
The ETR decreased from 2005 to 2012, with a cumulative
decline of 5% (the theoretical tax rate is 33%). Indeed, in 2004
all companies in member countries of the European Union
were required to use the standardized accounting principle
under the IFRS.2 Otherwise, our results can be explained by
compliance with the country's tax rules, which led to an in-
crease in the ETR (Lee & Swenson, 2012). This result was
confirmed by Atwood et al. (2012), who show that companies
engage in less tax evasion when their home country offers tax
benefits. Therefore, tax compliance rules tend to increase the
ETR.
As seen in Table S3 (available online), the board in our
sample has an average of 10 members. Similarly, the board
2
International Financial Reporting Standards (IFRS).
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Table 1
Variable, definitions.
Variable Definition Sources
Firm value Tobin's Q Market capitalization þ total debts/total assets Annual report
Effective tax rate ETR Income tax expense/pre-tax profits Annual report
Board size BSIZE Total number of directors on the board. Annual report
Board independence BINDE The percentage of independent directors on the board. Annual report
CEO Duality DUAL 1 if the CEO is the chairman of the board and 0 otherwise. Annual report
Board diversity DIVR Proportion of women on the board of directors Annual report
Audit committee AC Total number of directors on the audit committee Annual report
Firm size SIZE Log total assets Annual report
Dividends DIV (Dividend per share/earnings per share) * 100 Annual report
Firmgrowth GROWTH (Operating revenue (N)eoperating revenue (N-1))/operating revenue (N-1) Annual report
Return on assets ROA Pretax profits/total assets Annual report
Inflation rate INF Annual inflation rate. World Bank

structure reveals that on average 49.32%of the board members less tax planning trigger an increase in firm value. In addition,
are independent directors. Nevertheless, 37.85% of companies this result indicates that, in the context of developed countries,
combine the functions of general manager and the chairman of tax planning did not appear to play a significant role in
the board. An average 12.43% of companies have women on determining firm performance. This finding is not consistent
their boards. Finally, the audit committee averages 2.88 with the results of Desai and Hines (2002), who find that the
members. positive relationship between tax planning and firm value fa-
vors shareholders. More specifically, shareholders might
4.2. Correlation matrix respond negatively if tax planning were viewed as a risk-
related activity (Desai & Dharmapala, 2009). Furthermore,
One possible strategy for detecting multicollinearity is to in a progressive tax system, more profitable firms pay higher
use Spearman correlation analysis. Table S4 (online) presents taxes as a result of a higher marginal tax rate. In the same
the correlation matrix of all independent variables. All the context, Rego (2003) and Derashid and Zhang (2003)argue
correlation coefficients are lower than 0.7, which is the limit that more profitable firms have a lower cost associated with tax
indicating serious multicollinearity problem. This then in- planning because they have more resources to invest in tax
dicates the absence of multicollinearity between the explana- planning activities, which therefore indicates a positive rela-
tory variables in our regressions. tionship between the ETR and firm value. Similarly, Zeng and
Zhang (2009) argue that a higher ETR is associated with lower
4.3. Findings agency costs and less tunneling and fewer related-party
transactions among majority shareholders, thus they believe
As seen in Table 2, The coefficient of ETR is positive and that taxation enforcement can function as an external corpo-
statistically significant, which proves that an increase in ETR rate governance mechanism and, therefore, increase firm
leads to an increase in firm value. An increase in ETR actually value. We also argue that paying higher taxes increases the
means less tax planning, which leads to the conclusions that availability of firm-specific information for users other than
publicly traded firms, decreasing conflicts of interest among
stakeholders (Armstrong, Guay, & Weber, 2010).
Table 2 In addition, Chen et al. (2013) show that information
Results of model estimates. transparency, combined with tax avoidance, enhances firm
Coefficients Significance value, whereas firm value decreases when opaque firms
Constant 0.0004 0.995 engage in tax avoidance. As a consequence, ETR is an
ETR 0.5165 0.000*** important sign of information transparency that contributes to
BSIZE 0.0000 0.996 economic performance by disciplining corporate insiders to
BINDP 0.0978 0.027** select better investments, implement more efficient manage-
DUAL 0.0413 0.032**
ment of existing assets, and reduce expropriation of minority
DIVR 0.2020 0.004***
AC 0.0075 0.378 shareholder wealth (Bushman & Smith, 2003). Table 2 shows
SIZE 0.0446 0.032** that independence, board diversity, and CEO duality have a
LOG ROA 0.2878 0.000*** significantly negative effect on firm value. Many researchers
GROWTH 0.1413 0.000*** have also reported a negative relationship between the pro-
LOG DIV 0.0854 0.001***
portion of external directors and firm value. Agrawal and
INFL 0.0603 0.000***
Wald chi2 531.12 Knoeber (1996) find a negative relationship between the pro-
Prob > chi2 0.0000 portion of external directors and firm performance. The
***, **, and * denote statistical significance of the coefficients at 0.01, 0.05, effectiveness of outside directors as a governance mechanism
and 0.1 levels. is, therefore, questionable in developed countries because of

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the presence of external governance mechanisms, such as Table 3

mergers and acquisitions, market control of businesses, and Results of FGLS estimates: The moderating effect of the board on the rela-
tionship between firm value and tax planning.
competition. The significant effect of the presence of women
on the board does not mean that women are unable to exercise Coefficients Significance
a role as administrators. However, this result may imply that ETR 1.7771 0.000***
businesses use women as window-dressing, in which corporate BSIZE 0.0109 0.208
BINDP 0.1711 0.081*
culture does not help administrators succeed in their roles. DUAL 0.0892 0.087*
The negative effect of duality shows that firm value de- DIVR 0.1810 0.325
creases when CEOs are also chairmen of the board. In that AC 0.0008 0.969
case, CEOs have difficulty letting go of their personal in- BSIZE * ETR 0.0400 0.135
terests. Jensen (1993) argues that boards with an independent BINDP * ETR 0.8818 0.003***
DUAL * ETR 0.4406 0.008***
chairman are more effective. In this case, the chairman has no DIVR * ETR 1.3203 0.019**
conflicts of interest. Moreover, Rechner and Dalton (1991) AC * ETR 0.0271 0.683
empirically support the separation of CEO and chairman po- SIZE 0.0340 0.101*
sitions. In their study, they use accounting-based performance LOG ROA 0.2921 0.000***
measures that reveal that companies with separate CEO and GROWTH 0.1396 0.000***
LOG DIV 0.0984 0.000***
chairman functions are more efficient. In addition, all control INFL 0.0607 0.000***
variables have a significant effect on firm value. Indeed, a Wald chi2 571.62
significant and positive effect is observable between asset Prob > chi2 0.0000
performance and firm value. Thus, the ROA can be used as a ***, **, and * denote statistical significance of the coefficients at 0.01, 0.05,
sign of future cash flows. and 0.1 levels.
As seen in Table 2, the positive and significant relationship
between firm growth and firm value can be explained by the addition, the intensity of moderation relationship is very high
fact that, in developed countries, high growth opportunities for board independence (0.8818). This result indicates that
make the market react positively. Therefore, companies adding independent directors to the board will negatively
experiencing continuous growth have a higher probability of change the relation between tax planning and firm value and
surviving in the market. Similarly, an increase in firm growth the engagement in tax planning practices. These results show
spreads to other sectors, resulting in an increase in regional that additional independent members in the board will trigger
economic activity. This economic dynamism may lead to an increase in the firm value, as ETR gets smaller (more tax
significant growth. Results also show a negative relationship planning). Therefore, additional independent members may
between firm size and firm value. This finding can be decrease the costs and risks associated with tax planning,
explained as follows: a lack of communication and decision- which may change the effect on firm value (tax planning will
making problems hinder efficiency at large companies. In drive an increase in firm value). H2 is therefore rejected.
other words, companies sometimes suffer agency problems. As shown in this model, the estimated coefficient of DUAL
This suggests that they are controlled by managers who are is significantly positive, while the estimated coefficient of
pursuing opportunistic goals. Therefore, the profit maximiza- DUAL*ETR is statistically significant and negatively related
tion function can be replaced by the utility function of man- to firm value. In addition, the outcome showed a higher in-
agement maximization. The significantly negative relationship tensity of moderation relationship (0.4406), observing that
between dividends and firm value can be explained in the CEO duality will trigger a reduction of the firm value, as ETR
following way: the stock market reacts positively to an- gets larger. This result can be explained, among other things,
nouncements of increased dividends. Alternatively, the stock by the fact that inconsistency between financial and tax
market reacts negatively to companies that reduce their dis- reporting rules permits managers to engage in aggressive tax
tribution of dividends. As for the negative relationship be- activities (Phillips, Pincus, & Rego, 2003). In this winning
tween inflation and firm value, it can be explained by the fact scenario, CEOs are more willing to participate in aggressive
that high inflation predicts an economic downturn, and tax planning, because they can receive performance-related
therefore companies start to sell their shares (Mandelker & compensation and tax savings. H3 is therefore rejected.
Tandon, 1985). An increase in shares offers then reduces the When we interact gender diversity with tax planning, we
share price. In other words, an expected economic slowdown find that the coefficient on the interaction term is negative
encourages companies to sell financial stocks, and then infla- (1.3203) and significant at the 5% level, and the relationship
tion rises. Therefore, a low stock price tends to go hand in between tax planning and firm value is negatively moderated
hand with inflation. by female board representation. The outcome showed a higher
According to Table 3, the effect of board size on the rela- intensity of moderation relationship. These slope coefficients
tionship between tax planning and firm value is not significant, indicate that female board representation will trigger an in-
leading us to reject H1. As for the moderating effect of board crease in the firm value, as ETR gets smaller. Therefore,
independence on the relationship between tax planning and women's representation on boards may decrease the costs and
firm value, the results show that the estimated coefficient of risks associated with tax planning, which may change the ef-
BINDP*ETR is negative and significant at the 1% level. In fect on firm value. This finding is consistent with the results of

Please cite this article as: Khaoula, F., & Moez, D., The moderating effect of the board of directors on firm value and tax planning: Evidence from European
_
listed firms, Borsa Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.005
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F. Khaoula, D. Moez / Borsa Istanbul Review xxx (xxxx) xxx
Cox and Blake (1991), who find that greater gender diversity
can adversely affect firm performance if female directors are
tokens, rather than being named for their skill. Another
problem encountered by women is the “glass ceiling” (when
they reach positions at senior levels; Campbell & Mínguez-
Vera, 2008). Similarly, women are less likely to be promoted
to management positions, thus reducing their chances of future
success (Ryan & Haslam, 2005). In contrast, independent and
diverse boards, through accumulating functions, have potential
agency problems, which give rise to extreme levels of tax
planning. This can, therefore, reduce firm value.
5. Conclusion
This study examines the relationship between tax planning
and firm value and explores the moderating effect of board
characteristics on the relationship between tax planning and
firm value in developed countries. Our overall conclusion is
that tax planning does not appear to play a significant role in
determining firm value. A higher ETR is associated with lower
agency costs, and less tunneling and fewer related-party
transactions occur among majority shareholders, thus they
believe that tax enforcement can function as an external
corporate governance mechanism and, therefore, increase firm
value.
The findings of this study contribute to the literature in two
ways. First, they identify that shareholders are affected by tax
planning activities by European companies. Second, this study
provides evidence of a significant effect of the board of di-
rectors on shareholder valuation of firm tax planning. The
results indicate that board independence, diversity, and dual
functions have a significant and negative effect on the rela-
tionship between tax planning and firm value. The results are
consistent with the agency theory on tax planning, in which
information asymmetry, generally associated with tax plan-
ning, can result in moral hazard or fear of moral hazard.
The study has some interesting results and opens up op-
portunities for other researchers to pursue further research.
Several caveats to this study can be overcome by further
research. First, future studies can extend the sample period.
Second, the tax planning variable used in this study does not
fully explain the moderating effect of the board of directors in
the relationship between tax planning and firm value. There-
fore, further research can explore tax planning components,
such as aggregate corporate financial metrics that are less
sensitive to financing and investing decisions (Lazar, 2014).
Third, we propose extending the study by taking into account
other variables, such as the disciplinary role of each control-
ling shareholder in determining the tax strategy and, therefore,
firm value. Finally, the findings have policy implications for
academics, government officials, and company managers in
terms of the disclosure of tax expenses, reconciliation of
effective tax rates and corporate governance.
Conflict of interest
None.
Please cite this article as: Khaoula, F., & Moez, D., The moderating effect of the board of directors on firm value and tax planning: Evidence from European
_
listed firms, Borsa Istanbul Review, https://doi.org/10.1016/j.bir.2019.07.005
11
Acknowledgments
_
I am very grateful to editor of Borsa Istanbul Review and
reviewers for their constructive comments and suggestions,
which led to a significant improvement of the manuscript.
Appendix A. Supplementary data
Supplementary data to this article can be found online at
https://doi.org/10.1016/j.bir.2019.07.005.
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