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Does family ownership reduce corporate tax avoidance? The moderating effect of
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Safa Gaaya, Nadia Lakhal, Faten Lakhal,
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Safa Gaaya, Nadia Lakhal, Faten Lakhal, (2017) "Does family ownership reduce corporate
tax avoidance? The moderating effect of audit quality", Managerial Auditing Journal, https://
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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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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.
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.
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.
that engage in a higher level of corporate tax avoidance have larger book-tax differences.
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:
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.
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).
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
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
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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Corresponding author
Faten Lakhal can be contacted at: lakhal.faten@gmail.com
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