External corporate governance, tax planning, and firm performance

Abstract

We have attempted to theorize and empirically demonstrate the moderating effects of three external monitors (institutional investors, securities analysts, and external auditors) on the relationship between tax planning and firm performance. We propose that these monitors can affect either the form or the strength of that relationship. Data cover 73 companies listed in the Euronext 100 index for the period from 2008 to 2012. Empirical analyses are conducted using various statistical tools to identify the presence of moderator variables. Most importantly, results showed that institutional investors, securities analysts and external auditors moderate the form of the tax planning-performance relationship; it appears they involve themselves directly in the firms’ tax decisions. Interestingly, we find evidence that these external monitors moderate the strength of the tax planning-performance relationship; that is, they may indirectly influence the effectiveness of firm tax strategic. Our results are insensitive to alternative measures of firm performance, to additional control variables and to alternative specifications. Our paper offers two contributions to corporate governance research. First, against a backdrop of increased attention on firms’ tax planning, it provides empirical evidences concerning the nature and significance of the potential moderating effects of select external monitors on the relationship between tax planning and firm performance. Second, there is little attention about external monitors in research studies. In fact, this issue is not addressed in the literature within a European context using recent data.