The Nexus between Aggressive Tax Planning and Earnings Management in different Political Systems and the Moderating Role of Corporate Governance

This paper explores first the relationship between aggressive tax planning (TP) and earnings management (EM) in European listed companies and then compares this relationship between different political systems. It also examines the moderating role of board governance on aggressive TP and EM relationship. Using panel data of 105 companies listed on the EURONEXT 100 and NEXT 150 for the period 2011 to 2018 and alleviating endogeneity concern, the results show a significant positive relationship between aggressive TP and EM, where firms that tend to use EM practices have lower effective tax rate (ETR). Such relationship is more pronounced in countries with a Presidential system compared to parliamentary/quasi-parliamentary system. Again, board governance variables (i.e. board size and independence) show significantly negative moderating effect, suggesting that board plays an effective role in deterring EM practices by weakening the relationship between ETR and EM. These findings have important policy implications for respective stakeholders.