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Profitability and capital structure: Evidence from import penetration

Authors
Journal
Journal of Financial Economics
0304-405X
Publisher
Elsevier
Volume
106
Issue
2
Identifiers
DOI: 10.1016/j.jfineco.2012.05.015
Keywords
  • Expected Profitability
  • Leverage
  • Import Competition

Abstract

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.

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