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Profitability and capital structure: Evidence from import penetration

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  • Xu, Jin
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    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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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 106 (2012)
    Issue (Month): 2 ()
    Pages: 427-446

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    Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:427-446

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    Web page: http://www.elsevier.com/locate/inca/505576

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    Keywords: Expected profitability; Leverage; Import competition;

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