Managerial Auditing Journal

Does family ownership reduce corporate tax avoidance? The moderating effect of
audit quality
Safa Gaaya, Nadia Lakhal, Faten Lakhal,
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Corporate tax
Does family ownership reduce avoidance
corporate tax avoidance? The
moderating effect of audit quality
Safa Gaaya
ISCAE, Université de la Manouba, Manouba, Tunisia
Nadia Lakhal
ISG, Université de Sousse, Sousse, Tunisia, and
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Faten Lakhal
Institut de Recherche en Gestion; Université Paris-Est, Creteil, France
and ISG, Université de Sousse, Sousse, Tunisia

Abstract
Purpose – The purpose of this paper is to shed light on the effect of family ownership on corporate
tax avoidance. It also investigates whether audit quality affects tax avoidance practices by family
firms.
Design/methodology/approach – Based on a sample of 55 Tunisian listed companies from 2008 to
2013, the authors use GLS regression models estimated with robust standard errors, clustered at the firm
level.
Findings – The results show that family ownership is positively associated with corporate tax avoidance
practices, suggesting that families expropriate minority interests by extracting rents from tax-saving
positions. These practices are less prominent after the 2011 Tunisian revolution, suggesting that the pressure
from governments and non-governmental organizations against corruption and unethical behavior has
increased after the revolution. However, the findings show that audit quality curbs the incentives of family
firms to engage in aggressive tax positions, supporting the moderating effect of audit quality on the relation
between family ownership and tax avoidance.
Research limitations/implications – These findings suggest that Tunisian family firms are likely to
expropriate minority interests by extracting rents from tax-saving positions. However, in presence of high-
quality audit, the relation turns negative, suggesting that external audit quality is an efficient corporate
governance device that is likely to monitor family corporate decisions.
Originality/value – This paper extends previous research by investigating the moderating effect of
external audit quality on the relation between tax avoidance and family ownership. It also examines tax
avoidance by family firms in a unique setting: Tunisia, a transitioning economy subsequently to the 2011
revolution, where investors’ rights are weakly protected and the financial market is not well-developed as in
more developed countries.
Keywords Tax avoidance, Family ownership, Expropriation, Audit quality
Paper type Research paper

1. Introduction
Aggressive corporate tax practices prevent governments from their major resources and
have gained a growing attention from policy-makers and academics worldwide (Chen et al.,
2010). Taxes are commonly perceived as the most considerable cost incurred by firms. Managerial Auditing Journal
Therefore, managers are taking actions to shrink their tax liabilities. Tax avoidance is one of © Emerald Publishing Limited
0268-6902
the various plans firms may use to shirk their tax payments and increase their after-tax DOI 10.1108/MAJ-02-2017-1530
 MAJ income. Tax avoidance is deemed to be a major issue, given its complexity and economic
consequences (OECD, 2013).
Tax avoidance has attracted a growing attention in the recent research literature (Desai
and Dharmapala, 2008; Gallemore et al., 2014). Companies may have different preferences
regarding their involvement in tax avoidance activities. Indeed, these activities are
considered as risky corporate decisions (Armstrong et al., 2015). The incentives to avoid
taxes can be driven by numerous factors, such as size, leverage, profitability and corporate
governance (Lanis and Richardson, 2011; Dyreng et al., 2008; Minnick and Noga, 2010; Chen
et al., 2010). However, there is a lack of literature that investigates the effect of ownership
structure on tax avoidance (Chen et al., 2010; Cheng et al., 2012; Badertscher et al., 2013;
Steijvers and Niskanen, 2014; McGuire et al., 2014). Hence, the incentives to engage in such
risky activities may vary through different groups of shareholders (Lietz, 2013). A number
of recent studies recognize family ownership as a unique setting of economic organization
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(Randoy and Goel, 2003).

Two opposing views may explain the effect of family ownership on tax avoidance
practices. Fama and Jensen (1983) argue that family firms have lower agency costs because
of their high ownership and long investment horizons. This would align family
shareholders’ interests with minority ones (Shleifer and Vishny, 1986). Moreover, family
ownership is an important corporate governance feature that mitigates the potential
problem of managerial opportunism. Accordingly, Chen et al. (2010) find that family firms
are less tax aggressive than non-family firms. Hence, family owners have less incentive to
produce additional cash flows to shape potential penalties and reputational costs if tax
authorities detect aggressive tax positions. Families are indeed concerned with reputation
costs and penalties. Particularly, family owners care about their firm reputation and their
“family name”, as they perceive their firms as legacies to be passed on to the next
generations (Casson, 1999). Furthermore, Desai and Dharmapala (2006) highlight the
potential price discount imposed by external shareholders when they perceive rent
extraction from tax avoidance practices.
However, an opposing view suggests that conflicts of interests in family firms are the one
between controlling and minority shareholders. Families are then likely to act as a controlling
shareholder and expropriate private benefits of control at the expense of minority shareholders
(Shleifer and Vishny, 1986). Recent research argues that corporate tax avoidance activities
exacerbate the conflict of interests by creating opportunities for managers to engage in
activities to hide bad news and mislead investors (Desai and Dharmapala, 2008). The conflicts
of interests between family owners and minority shareholders lead family firms to extract
private benefit from tax savings. As families are holding large capital shares, rent extraction
becomes more opportunistic for these specific owners. This argument is in line with the private
benefit expropriation hypothesis (Shleifer and Vishny, 1986).
The trade-off between benefits stemming from tax savings (rent extraction generated by
corporate tax avoidance) and incurred costs of reputation damages is higher for family
owners than their non- family counterparts. Families have indeed large ownership, long
investment horizons and great reputation concerns, suggesting that tax avoidance in family
firms remains an empirical issue (Chen et al., 2010).
This study adds to the literature of tax avoidance by family firms twofold. First, we shed
some light on the relation between corporate tax avoidance and family ownership. Till now,
very few studies have examined the effect of family ownership on corporate tax avoidance
in developed economics (Chen et al., 2010; Steijvers and Niskanen, 2014). To our knowledge,
no studies investigate tax avoidance of family firms in an emerging market. Then, we draw
on previous works, to examine the effect of family ownership on tax avoidance in a different
 institutional setting: Tunisia. Most Tunisian listed companies are families; the financial Corporate tax
market in Tunisia is less developed; and investors’ interests are poorly protected. Besides, avoidance
the pressure from civil society is increasing after the 2011 revolution to face corruption and
unethical behavior and build up the best management practices to attract foreign investors
[1]. We then examine the behavior of Tunisian families regarding tax avoidance activities
and show how family firms react to those challenges. Second, this paper extends previous
research to draw attention on the moderating effect of audit quality on the relation between
family ownership and corporate tax avoidance. A stream of research investigates the effect
of monitoring devices on corporate tax avoidance practices. Audit quality is deemed to be an
important governance feature that is likely to moderate the relation between corporate tax
avoidance and family ownership. Hence, audit quality plays a crucial role in resolving
problems generated by conflicts of interests between firms and their shareholders
(Richardson et al., 2013).
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We use a sample of all firms listed on the Tunisian stock exchange from 2008 to 2013.
Based on GLS regression models estimated with robust standard errors, clustered at the
firm level, we find that Tunisian family firms engage in corporate tax avoidance to reduce
their tax liabilities. This finding suggests that the conflict of interests in family firms and
the weak protection of minority shareholders’ interests in less developed markets lead
families to expropriate minority shareholders by extracting high rents from tax-saving
positions. However, we find that audit quality curbs the incentives of family firms to involve
in corporate tax avoidance. Our findings are specific to the Tunisian emerging market; they
may not be generalized to more developed countries.
The remainder of the paper is as follows. Section 2 develops literature review and
hypotheses on the relation between tax avoidance and family ownership. Section 3 presents
the sample, data and methodology. We discuss our results in Section 4. The last section
concludes the paper.

2. Literature review and hypotheses development

2.1 Family ownership and corporate tax avoidance
Compared to other shareholders, family ownership is considered as an effective
organizational structure (Randoy and Goel, 2003; Andres, 2008). Family firms have higher
ownership concentration, lower diversification policies, long-term objectives and greater
reputation concerns (Chen et al., 2010). Moreover, families are involved in the management
which may affect their corporate decisions.
Along with these characteristics, there are two competing views regarding the effect of
family ownership on corporate tax avoidance. Families have substantially high ownership
concentration which mitigates agency costs between management and ownership (Jensen
and Meckling, 1976). The alignment hypothesis suggests that families act less
opportunistically and are likely to avoid risky activities, including tax avoidance practices
(Steijvers and Niskanen, 2014). Furthermore, family owners hold large controlling positions
over the management and on boards. This substantial involvement in the firm leads to align
management and control interests (Anderson and Reeb, 2003). Compared to non-family
firms, families are considered as the most efficient form of organization with low agency
costs (Ang et al., 2000). Family ownership is also assumed to be an alternative governance
device (Jensen and Meckling, 1976). This argument suggests that as a corporate governance
feature, family ownership mitigates the potential problem of managerial opportunism and
leads to less aggressive tax positions.
Moreover, families are concerned with reputation costs and penalties. Particularly,
family owners are less inclined to undertake aggressive tax positions because they care
 MAJ about their “family name”. Family owners recognize their firms as a legacy to transmit to
their successors (James, 1999). They are then concerned about the long-term value of their
business, rather than the short-term benefits. Desai and Dharmapala (2006) put forward
another cost for tax aggressiveness, the potential price discount imposed by external
shareholders when they perceive tax avoidance as rent extraction by insiders. Accordingly,
Chen et al. (2010) find that family firms are less tax aggressive than non-family firms.
Family owners have less incentive to produce additional cash flows to shape potential
penalties and reputational costs if tax authorities detect aggressive tax positions. In line
with these arguments, it is expected that family owners are less likely to engage in
aggressive tax practices.
Conversely, the opposing view suggests that family firms undertake tax avoidance
practices. Indeed, the conflicts of interests in family firms are those between large and
minority shareholders. Families are then likely to act as a controlling shareholder and to
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expropriate private benefits at the expense of minority shareholders (Shleifer and Vishny,
1986). Despite the potential costs generated by such aggressive activities, firms may use
corporate tax avoidance to hide losses, cover the details of any kind of rent extraction and to
mislead minority investors (Desai and Dharmapala, 2006; Kim et al., 2011). However,
Blaylock (2015) explores the relation between corporate tax avoidance and rent extraction
and find no evidence that tax avoidance allows mangers to extract rents.
The benefits from tax savings include the rent extraction by shareholders or
opportunistic managers (Desai and Dharmapala, 2006, Desai et al., 2007). Family firms are
likely to increase those benefits and, hence, expropriate private benefits of control. As
families are holding large capital shares, rent extraction becomes more opportunistic for
these firms. This argument is in line with the private benefit expropriation hypothesis.
Furthermore, according to the entrenchment hypothesis, families could increase their
power in the company through high voting rights to entrench themselves and exacerbate the
expropriation of minority interests (La Porta et al., 1999). Family members are involved in
management and on boards of directors to enhance their power on the firm. Burkart et al.
(2003) show that most family firms are managed by a family member, particularly, for those
countries where investors’ interests are weakly protected. The entrenchment hypothesis
suggests that powerful families would take corporate decisions that benefit them at the
expense of external shareholders. They are then inclined to engage in tax-saving positions to
extract higher rents (Steijvers and Niskanen, 2014).
The preceding discussion shows that the relation between family ownership and tax
avoidance is ambiguous. Hence, there are claims in favor of tax avoidance engagement and
others that encounter these practices by family owners. In the specific Tunisian setting,
investors’ interests are weakly protected as Tunisia is a civil law country. Besides, the
financial market is not well-developed, and the likelihood for minority shareholders’
expropriation is exacerbated. Therefore, we expect that in such weakly controlled
environment, Tunisian family firms are entrenched and have incentives to expropriate
minority interests to increase their wealth at the expense of minority shareholders. They may
prefer to extract rents through tax-saving strategies. Our first hypothesis is then as follows:
H1. There is a positive association between family ownership and the level of corporate
tax avoidance.

2.2 The moderating effect of audit quality

Corporate governance is considered as a channel that reduces tax avoidance activities. Kim
et al. (2011) claim that tax avoidance decrease stock crash risk in well-governed firms. In line
 with Kim et al. (2011), Armstrong et al. (2015) examine the relation between managerial Corporate tax
incentives and corporate tax avoidance. They document that agency problems can lead avoidance
managers to over-invest in tax avoidance. They find, however, that corporate governance
shrinks higher levels of tax avoidance.
According to the agency theory perspective, audit quality is important in reducing conflicts
of interests between managers and external shareholders. Audit quality is a corporate
governance feature that controls managers’ actions and deter accounting manipulation and any
fraudulent activities (DeAngelo and Masulis, 1980). External auditors are expected to offer an
independent judgment on firm’s financial statements. Furthermore, external auditors assess
whether their clients follow aggressive tax positions that may fall into the grey area and could
be detected by tax authority (Gallemore et al., 2014, Guenther et al., 2017).
According to recent literature, high-quality auditors have less incentives to engage in
corporate tax avoidance, as they would bear harmful consequences if tax authorities detect
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aggressive positions. They may incur loss of reputation and trust following the public
disclosure of tax avoidance behavior (Hanlon and Slemrod, 2009). Donohoe and Knechel
(2014) suggest that aggressive tax firms can expose their external auditors to higher risk
and litigation costs. Lanis and Richardson (2012) prove that “Big4” audit reduces the
likelihood of uncertain tax positions. Similarly, in a multi-country setting, Kanagaretnam
et al. (2016) find that big N auditor are associated with a low level of corporate tax avoidance
because they are more concerned with reputational damages.
Accordingly, we predict that external audit quality by family firms would reduce their
propensity to extract rents from their tax-savings positions. Indeed, well-monitored family
decisions will have negative impact on tax avoidance levels, leading these firms to be less
opportunistic and to align their interests with minority shareholders ones. We then
formulate our second hypothesis:
H2. There is a negative association between family ownership and tax avoidance in
well-audited firms.

3. Research design
3.1 Sample selection and data collection
Our sample includes all firms listed on the Tunisian Stock Exchange (BVMT) between 2008
and 2013. The sample consists of 55 listed companies. Tax data and firm characteristics
were extracted from the financial statements of listed companies available either on their
websites or on the Tunisian Stock Exchange Website. Family ownership data were hand-
collected from the annual reports of listed companies available in the center of Financial
Market Council information. We exclude observations with negative pre-tax income. The
final sample includes 315 firm-year observations.

3.2 Corporate tax avoidance measures

Following Dyreng et al. (2008), we initially consider tax avoidance as firm’s tax burden. This
means that tax avoidance includes all types of explicit tax planning activities. We then use
multiple proxies to measure our dependent variable to capture a wide range of corporate tax
avoidance activities. According to Lin et al. (2014), no single measure is likely to capture all
tax-aggressive behavior. Hence, recent literature has developed a number of corporate tax
avoidance measures (Dyreng et al., 2008; 2010; Frank et al., 2009).
The first measure is the firm’s effective tax rate (ETR) that refers to total tax expense
scaled by the pre-tax income. This measure is widely used in recent literature (Lanis and
Richardson, 2011; Minnick and Noga, 2010; Chen et al., 2010). ETR is an appropriate
 MAJ measure to asses firms’ tax avoidance behavior for several reasons. ETR could capture any
form of tax reduction through tax shelters and loopholes present in tax laws (Dyreng et al.,
2017). ETR is an inverse function of tax avoidance, as lower values of effective tax rate
imply a greater involvement in corporate tax avoidance (Frank et al., 2009).
Our second measure of corporate tax avoidance is the cash flow effective tax rate
(CFETR). It equals to total tax expenses scaled by operational cashflows (Lanis and
Richardson, 2011; Richardson et al., 2013). This measure is based on information from cash
flow statements, which can exclude the impact of earnings managements (Chen et al., 2014).
Our final measure is the Book-Tax Difference (BTD) which is commonly used in tax
literature. It refers to the firm’s pre-tax book income minus estimated taxable income scaled by
total assets (Wilson, 2009; Lin et al., 2014). To calculate the BTD of each firm, we first estimate
the taxable income based on the current tax expense divided by the statutory tax rate. Firms
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that engage in a higher level of corporate tax avoidance have larger book-tax differences.

3.3 Econometric specification

To test empirically the relation between family ownership and corporate tax avoidance as
specified in our first hypothesis, we use GLS regression models estimated with robust
standard errors, clustered at the firm level. We test the following regression models:
TAXi;t ¼ a1 þ a2 FOWNi;t þ a3 SIZEi;t þ a4 LEVi;t þ a5 ROAi;t þ a6 MKTBi;t
þ a7 Revoli;t þ « it

TAXi;t ¼ a1 þ a2 FOWNi;t þ a3 FOWNi;t  Revoli;t þ a3 SIZEi;t þ a4 LEVi;t

þ a5 ROAi;t þ a6 MKTBi;t þ a7 Revoli;t þ « it

where:
TAX is either the firm’s ETR, the firm’s CFETR or BTD.
FOWN refers to family ownership measured by the percentage of shares held by
shareholders belonging to the same family. Following Anderson and Reeb (2003), we
consider family firms as firms where founders or their family members continue to take
positions in top management, on the board committee, or are block-holders of the firm.
FOWN  Revol is the interaction term between family ownership and the 2011 Tunisian
revolution. We use a dummy variable to proxy for the Tunisian revolution (Revol). This
variable takes the value of 1 for the post-revolution period and 0 otherwise.
To examine the moderating effect of audit quality, we introduce an interaction term
between audit quality and family ownership and estimate the following model:

TAXit ¼ a1 þ a2 FOWNit þ a3 FOWNit  BIG4 þ a4 BIG4it þ a5 SIZEit þ a6 LEVit

þ a7 ROAit þ a8 MKTBit þ « it

Where:
FOWN  BIG4 is the interaction term between family ownership and audit quality. We
use a dummy variable to proxy for audit quality (BIG4). This variable takes the value of 1 if
the firm is audited by a Big4 company and 0 otherwise.
We also include a set of control variables in our regression models referring to firm
characteristics that may affect tax avoidance behavior.
 SIZE is firm size measured by the natural logarithm of total assets. Larger firms engage Corporate tax
more in corporate tax avoidance compared to smaller firms because of their further social avoidance
and economic power (Lin et al., 2014 and Richardson et al., 2013).
LEV is the ratio of total long-term debts scaled by total assets. Richardson et al. (2015)
and Badertscher et al. (2013) find a positive relation between leverage and tax avoidance
given tax deductible-interest payments.
ROA is the ratio of return on assets ratio (ROA). Profitable firms have more incentives to
engage in corporate tax avoidance to shrink their tax burdens (Lanis and Richardson, 2012
and Minnick and Noga, 2010).
MKTB is the ratio of market to book value to control growth opportunities. Richardson et al.
(2015) show that growth opportunities positively affect tax avoidance levels. According to Chen
et al. (2010), firms with high growth opportunities make acquisitions with tax advantages.
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Revol is a dummy variable that refers to the 2011 Tunisian revolution, coded 1 for the post-
revolution period, that is, 2011-2013 and 0 for the pre-revolution period. This variable control
for the difference in corporate tax avoidance that may occur because of this political event.

4. Results and analysis

4.1 Descriptive statistics
Table I reports the summary statistics of our dependent and independent variables. The
mean values for ETR and CFETR are, respectively, 17.55 and 12.29 per cent. These results
show a reasonable level of corporate tax avoidance compared to those reported by Minnick
and Noga (2010) and Lin et al. (2014) in the US context. The level of corporate tax avoidance
measures varies significantly between our sampled firms. The lowest level of ETR, CFETR
and BTD are 55.06, 39.81 and 6.88 per cent, whereas the highest levels are 100, 100 and
32.72 per cent. The mean value of FOWN is 23.6 per cent.

Variables Mean SD Minimum Maximum

ETR 0.1755 0.2101 0.5506 1

CFETR 0.1229 0.1496 0.3981 1
BTD 0.0374 0.0576 0.0688 0.3274
FOWN 0.2363 0.3035 0 0.8933
SIZE 19.063 1.8208 15.5193 22.891
LEV 0.1326 0.1994 0 0.8405
ROA 0.0564 0.0828 0.2516 0.3550
MKTB 2.3941 2.2565 1.1401 26.042

Frequency
0 1
BIG4 0.6211 0.3788
REVOL 0.4906 0.5093

Notes: Table displays descriptive statistics for a sample of 330 firm-year observations. ETR is total tax
expense scaled by pre-tax income. CFETR is total tax expense scaled by cash flows. BTD is Book-Tax
Differences calculated as the pre-tax book income minus estimated taxable income scaled by total assets.
FOWN: the percentage of capital held by shareholders belonging to the same family. AUD is a dummy
variable taking the value 1 if the firm is audited by BIG4 and 0 otherwise. SIZE is the natural logarithm of
total assets. ROA is the ratio of pre-tax income scaled by total assets. LEV is the ratio of total long-term
debts divided by total assets. MKTB is market capitalization divided by total book value. REVOL is a Table I.
dummy variable taking the value 1 if the observation is after the revolution and 0 otherwise Descriptive statistics
 MAJ 4.2 Bivariate analysis
We perform difference in means tests between family and non-family firms using
parametric and non-parametric tests (the paired t-test and Wilcoxon Rank-sum test). The
grouping variable is family. It is a dummy that equals to 1 for family firms and 0 for non-
family firms. The results show that tax avoidance levels are statistically different for the
overall tax avoidance measures between family and their non-family counterparts. We
notice that the mean of ETR of family firms (15.04 per cent) is lower than the one recorded
for non-family firms (19.40 per cent). The difference in means is statistically significant at 5
and 1 per cent levels, respectively, using the parametric student test and the non-parametric
test. As the effective tax rate is an inverse function of the tax avoidance level, it seems then
that families engage more in tax avoidance activities than their non-family counterparts.
Our second measure of BTD confirms this preliminary result. The BTD measure is a
positive function of tax avoidance practices. Table II shows that the BTD is on average 5.57
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per cent for family firms, significantly higher than the one recorded for non-family firms of
about 2.54 per cent. Finally, as for ETR, the CFETR measure of family firms is on average
9.58 per cent lower than the mean reported by their non-family counterparts (14.34 per cent).

4.3 Correlation matrix

Table III reports the Pearson pairwise correlations among the variables used in our empirical
regressions. We find ETR and CFETR are significantly and positively correlated, while BTD is
significantly and negatively correlated with ETR and CFETR. This finding supports previous
studies that various measures of corporate tax avoidance are highly correlated. We also notice
a negative and significant correlation between family ownership and ETR and CFETR.
Conversely, we find a positive and significant correlation between family ownership and BTD.
These results give preliminary evidence that family firms are inclined to engage in corporate
tax avoidance activities. As correlations among the independent variables are generally low,
there is no problem arising from multicollinearity between independent variables used in our
regression models. We compute also the Variation Inflation Factor (VIFs) to test for the
multicolinearity problem. VIF values range between 1.1 and 2.78 below the level of 10 (Neter
et al., 1996), which confirms the lack of the multicollinearity problem.

4.4 Multivariate analysis

4.4.1 Results and discussion. Table IV shows the results of the effect of family ownership on
tax avoidance using three alternative proxies for corporate tax avoidance: ETR, CFETR and

The level of corporate p-value of the difference

tax avoidance Family/non-family firms Mean Parametric test Non-parametric testa

ETR 1 0.150424 0.0325** 0.0018***

0 0.194023
CFETR 1 0.095816 0.002*** 0.0094***
0 0.143494
BTD 1 0.055725 0.031** 0.000***
0 0.025396

Notes: Table reports the means difference tests for a sample of 330 firm-year observations between family
and non-family firms. ETR is total tax expense scaled by pre-tax income. CFETR is total tax expense scaled
by operational cash flows. BTD is book-tax differences calculated as the pre-tax book income minus
Table II. estimated taxable income scaled by total assets; aWilcoxon Rank-sum (Mann-whitney) test; ***, ** are
Mean difference tests significance levels at 1 and 5%, respectively
 Variables ETR CFETR BTD FOWN BIG4 SIZE LEV ROA
Corporate tax
avoidance
ETR 1.0000
CFETR 0.5745*** 1.0000
BTD 0.4907*** 0.3026** 1.0000
FOWN 0.0949* 0.2694* 0.2671*** 1.0000
BIG4 0.0862 0.1409 0.0254 0.0853 1.0000
SIZE 0.1118** 0.1866 0.3286*** 0.2604*** 0.2656*** 1.0000
LEV 0.0355 0.0072 0.2220*** 0.1339* 0.0105 0.0678 1.0000
ROA 0.0466 0.0253 0.5915*** 0.1542*** 0.0758 0.1884*** 0.2660*** 1.0000
MKTB 0.1983*** 0.4268*** 0.2787*** 0.3634*** 0.0007 0.1248** 0.0644 0.2285***
VIF 2.78 1.84 1.22 1.10 1.20

Notes: Table displays Pearson correlation matrix of our variables. ETR is total tax expense scaled by pre-
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tax income. CFETR is total tax expense scaled by operational cash flows. BTD is book-tax differences
calculated as the pre-tax book income minus estimated taxable income scaled by total assets. FOWN: the
percentage of capital held by shareholders belonging to the same family. BIG4 is a dummy variable taking
the value 1 if the firm is audited by BIG4 and 0 otherwise. SIZE is the natural logarithm of total assets. ROA
is the ratio of pre-tax income scaled by total assets. LEV is the ratio of total long-term debts divided by total
assets. MKTB is market capitalization divided by total book value. REVOL is a dummy variable taking the Table III.
value 1 if the observation is after the revolution and 0 otherwise Correlation matrix

ETR CFETR BTD

Variables Coefficient p-value Coefficient P-value Coefficient p-value

FOWN 0.0466*** 0.000 0.0966*** 0.000 0.0058** 0.048

SIZE 0.0078*** 0.001 0.0045** 0.028 0.001*** 0.002
LEV 0.0127 0.366 0.0884*** 0.000 0.008*** 0.000
ROA 0.1358** 0.019 0.484*** 0.000 0.3708*** 0.000
MKTB 0.0118*** 0.000 0.0011 0.474 0.0015** 0.011
REVOL 0.0218*** 0.001 0.0077 0.308 0.0016 0.116
Constant 0.0425 0.381 0.0429 0.70 0.0336*** 0.003
Observations 315 254 309

Notes: Table reports regression results using generalized least squares. ETR is total tax expense scaled by
pre-tax income. CFETR is total tax expense scaled by operational cash flows. BTD is book-tax differences
calculated as the pre-tax book income minus estimated taxable income scaled by total assets. FOWN: the
percentage of capital held by shareholders belonging to the same family. SIZE is the natural logarithm of Table IV.
total assets. ROA is the ratio of pre-tax income scaled by total assets. LEV is the ratio of total long-term
debts divided by total assets. MKTB is market capitalization divided by total book value. REVOL is a Regression results
dummy variable taking the value 1 if the observation is after the revolution and 0 otherwise. ***, **, * are for the three tax
significance levels at 1, 5 and 10%, respectively avoidance measures

BTD. ETR and CFETR are an inverse function of corporate tax avoidance. We find a
negative and statistically significant relation between family ownership and ETR at the 1
per cent level as shown in Column (1) of Table IV, suggesting that family ownership
exacerbates tax avoidance levels. This finding supports our first hypothesis. Tunisian
family firms are more likely to engage in corporate tax avoidance practices than their non-
family counterparts. We find that the negative relation remains unchanged when we use the
cash flow ETR measure (CFETR) as reported in Column (2) of Table IV. As for the BTD
measure, the results in Column (3) supports the preceding ones. Table IV shows a positive
and statistically significant relation between family ownership and BTD at the 5 per cent
level, suggesting that family firms engage in corporate tax avoidance practices. These
 MAJ findings are not consistent with those of Chen et al. (2010), who prove in the US context, that
family firms are less inclined to engage in corporate tax avoidance because they are more
concerned with the potential penalties and reputational costs imposed by the tax
administration and the Security Exchange commission (SEC). Contrary to Chen et al. (2010),
who focus on a developed market and common law country where shareholders’ interests
are well protected, we investigate firms in a civil law country. In such a setting,
shareholders’ interests are weakly protected and the likelihood of minority interests’
expropriation is more exacerbated. Family firms have incentives to use corporate tax
avoidance practices to generate more tax savings. Our findings support then the
expropriation hypothesis (Jensen and Meckling, 1976), suggesting that families expect to
gain more benefits from extracting rent by saving more tax at the expense of minority
shareholders. It seems that these benefits outweigh costs incurred by firms engaging in such
risky activities. In addition to the potential rents generated by such aggressive activities,
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family owners generally hold controlling positions over the board and may use corporate
tax avoidance to hide losses and to mislead minority investors. These findings suggest that
Tunisian listed family firms may ignore the potential costs by tax authorities because of the
deterrent Tunisian system not enough distrustful to reduce aggressive tax positions.
Among control variables, Table IV shows that there is a negative relation between firm
size and tax avoidance. Firm size positively influences the ETR tax avoidance measure
where it negatively affects the book tax difference one. Large firms are less likely to engage
in corporate tax avoidance than small firms. These findings are not supported by recent
studies (Richardson et al., 2015), suggesting that larger firms are less tax aggressive because
they care about loss of reputation and their market value. We also find that profitability is
negatively associated with tax avoidance. Firms with a higher return on assets have less
incentive to engage in higher corporate tax avoidance. This finding is similar to Richardson
et al. (2013). However, we find that firms with high growth opportunities are more likely to
engage in aggressive tax positions to hide their benefits and reduce their tax liabilities.
We add a dummy variable to examine the effect of the Tunisian 2011 revolution on tax
avoidance practices and find that the coefficient for this variable is positive and significant
only for the ETR tax avoidance measure (Column 1). This finding suggests that tax
avoidance practices decrease in the post-revolution period compared to the pre-revolution
one. Indeed, after the 2011 revolution, there have been several measures against corruption,
illegal acts and unethical behavior by successive governments and several non-
governmental organizations. Indeed, this political event was at the origin of multiple
positions against business transgression by the civil society.
As the revolution impact on corporate tax avoidance is important, we test the moderating
effect of revolution (pre and post periods) on the relation between family ownership and
corporate tax avoidance. We add an interaction term of FOWN  Revol to our model. We run
our regression model on the ETR inversed measure of tax avoidance. Table V shows that the
association between family ownership and ETR turns positive. We find indeed a positive and
statistically significant coefficient on the interaction term between revolution and family
ownership. This finding shows that subsequently to the 2011 revolution, the propensity of family
firms to engage in corporate tax avoidance practices is mitigated. Hence, the 2011 revolution
influences tax avoidance practices in family Tunisian firms. This is because of the increasing
pressure from civil society and governments that has arguably affected this striking problem.
Table VI reports the regression results for the moderating effect of auditor quality on the
relation between family ownership and corporate tax avoidance. The results show a significant
and positive association between the interaction variable of FOWN  AUD and ETR (p <
0.01). This finding provides support for our second hypothesis. Hence, audit quality reduces tax
 ETR
Corporate tax
Variables Coefficient p-value avoidance
FOWN 0.0695*** 0.000
FOWN  Revol 0.0436*** 0.002
SIZE 0.0069*** 0.004
LEV 0.0116 0.319
ROA 0.1377*** 0.019
MKTB 0.0117*** 0.000
Revol 0.218*** 0.001
Constant 0.0703 0.135
Observations 315

Notes: Table reports regression results using generalized least squares. ETR is total tax expense scaled by
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pre-tax income. FOWN is the percentage of capital held by shareholders belonging to the same family. Table V.
Revol is a dummy variable taking the value 1 for the post-revolution period 2011-2013 and 0 otherwise.
SIZE is the natural logarithm of total assets. ROA is the ratio of pre-tax income scaled by total assets. LEV Regression on the
is the ratio of total long-term debts divided by total assets. MKTB is market capitalization divided by total effect of the 2011
book value; ***, **, * are significance levels at 1, 5 and 10%, respectively Tunisian revolution

ETR CFETR BTD

Variables Coefficient P-value Coefficient P-value Coefficient P-value

FOWN 0.0913*** 0.000 0.118*** 0.000 0.0224 0.131

FOWN  AUD 0.0782*** 0.005 0.064** 0.014 0.0068 0.744
AUD 0.0281*** 0.006 0.1404 0.250 0.0108 0.18
SIZE 0.0088*** 0.002 0.0025 0.368 0.0034** 0.049
LEV 0.1002 0.508 0.0899*** 0.000 0.0096 0.488
ROA 0.1109* 0.092 0.453*** 0.000 0.3797*** 0.000
MKTB 0.1129*** 0.000 0.001 0.543 0.0019 0.286
REVOL 0.0193*** 0.005 0.0089 0.25 0.002 0.726
Constant 0.0342 0.54 0.0604 0.26 0.0723 0.038
Observations 315 309 254

Notes: Table reports regression results using generalized least squares. ETR is total tax expense scaled by
pre-tax income. CFETR is total tax expense scaled by operational cash flows. BTD is Book-Tax Differences
calculated as the pre-tax book income minus estimated taxable income scaled by total assets. FOWN: the
percentage of capital held by shareholders belonging to the same family. BIG4 is a dummy variable taking
the value 1 if the firm is audited by BIG4 and, 0 otherwise. SIZE is the natural logarithm of total assets. Table VI.
ROA is the ratio of pre-tax income scaled by total assets. LEV is the ratio of total long-term debts divided
by total assets. MKTB is market capitalization divided by total book value. REVOL is a dummy variable Regression results of
taking the value 1 if the observation is after the revolution and, 0 otherwise; ***, **, * are significance levels the moderating audit
at 1, 5 and 10% respectively variable

avoidance levels by family firms. The effect of family ownership on tax avoidance turns then
negative if these activities are well-governed. The level of corporate tax avoidance is indeed
mitigated in family firms with high audit quality, suggesting that families’ behave less
opportunistically in the form of rent extraction when they are well-monitored by strong corporate
governance practices, particularly the role of audit quality in detecting such risky practices.
Using CFETR as a measure of corporate tax avoidance, we confirm our preceding
finding. Indeed, there is a significant association between the interaction variable of
FOWN  AUD and CFETR.
 MAJ Regarding the BTD measure, we do not find a significant association between BTD and our
audit quality in family firms. This means that each proxy of corporate tax avoidance could
capture some aggressive positions. However, for our control variables, we find that BTD is
negative and significant associated with audit quality (p < 0.05), suggesting that big firms do
not engage in corporate tax avoidance. It was also shown significant and positive relation
between ROA and BTD. This means that firms with a higher return of assets seem to engage
in corporate tax avoidance supporting the findings of Lanis and Richardson (2012).

5. Conclusion
The purpose of this study is to investigate the effect of family ownership on corporate tax
avoidance practices. Based on a sample of 55 Tunisian listed firms over a 2008-2013 period,
we find that Tunisian founding family firms avoid taxes more aggressively to reduce their
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tax liabilities than their non-family counterparts. With regards to the Tunisian context, our
findings are interesting. Tunisia is a unique setting where investor rights are weakly
protected and the market is not well-developed. These two arguments lead family firms to
use tax-savings activities to extract private benefits at the expense of minority shareholders.
Families would then benefit from such activities even though there are high costs incurred
by these firms. However, we show that the 2011 Tunisian revolution plays a crucial role to
reduce the slightly high level of corporate tax avoidance in family listed firms. This is not
surprising, as in Tunisia, the fight against forceful tax planning has increased importance
since the revolution, and it has also become a topic of election campaigns.
We further provide new evidence that high audit quality moderates firm’s tax avoidance
in family firms. We show that in well-monitored companies, the relation between family
ownership and tax avoidance turns negative. Families reduce their opportunistic behavior
when they are monitored by a high external audit quality, suggesting that tax avoidance
deter with higher audit quality. These findings suggest several courses of acts by Tunisian
policy-makers to tackle this issue by establishing high ethically standards and
implementing new rules regarding audit procedures, particularly in a transitioning economy
that is striving to attract foreign investors.
Finally, some limitations need to be considered. First, our results may not be generalized
to more developed countries because it is important to take into consideration the Tunisian
institutional setting. Hence, Tunisia is an emerging market that is undergoing a democratic
transition which is affecting economic and social progress. Second, following recent
literature, we use an approximate value to measure the BTD as taxable income.
Future research in corporate tax avoidance may focus on the consequences of those
aggressive practices for market participants. Further work needs to be done to investigate
whether different ownership structures (concentrated, managerial or institutional investors’
ownership) would reduce or exacerbate corporate tax avoidance practices in weakly
protected investors’ environments.

Note
1. The promulgation of best governance practices guide of Tunisian companies in 2012.

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Accounting Research, Vol. 50 No. 3, pp. 775-810.

Corresponding author
Faten Lakhal can be contacted at: lakhal.faten@gmail.com

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