Profitability and capital structure: Evidence from import penetration

Jin Xu

Journal of Financial Economics, 2012, vol. 106, issue 2, 427-446

Abstract: Firms experiencing increases in import competition significantly reduce their leverage ratios by issuing equity and selling assets to repay debt. Using import tariffs and foreign exchange rates as instrumental variables for import penetration, I show that these results are not manifestations of endogenous relations between import competition and leverage. The results are consistent with traditional trade-off models of capital structure that predict a positive relation between book leverage and expected future profitability. Further evidence suggests that import competition affects leverage through changes in the trade-off between the tax benefits of debt and the costs of financial distress.

Keywords: Expected profitability; Leverage; Import competition (search for similar items in EconPapers)
JEL-codes: D43 F12 G32 G33 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (114)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:2:p:427-446

DOI: 10.1016/j.jfineco.2012.05.015

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