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Profitability and Capital Structure: Evidence from Import Penetration

58 Pages Posted: 20 Mar 2008 Last revised: 21 Apr 2013

Jin Xu

Virginia Tech - Pamplin College of Business

Date Written: October 24, 2011

Abstract

I find that 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 tradeoff models of capital structure that predict a positive relation between book leverage and future expected profitability. Further evidence suggests that import competition affects leverage through changes in the tradeoff between the tax benefits of debt and the costs of financial distress.

Keywords: expected profitability, leverage, import competition

JEL Classification: D43, F12, G32, G33

Suggested Citation

Xu, Jin, Profitability and Capital Structure: Evidence from Import Penetration (October 24, 2011). Journal of Financial Economics 106(2), November 2012, pages 427-446. Available at SSRN: https://ssrn.com/abstract=972816

Jin Xu (Contact Author)

Virginia Tech - Pamplin College of Business ( email )

Department of Finance
880 West Campus Dr
Blacksburg, VA 24061
United States

HOME PAGE: http://www.finance.pamplin.vt.edu/jin-xu/

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