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Trade Liberalization, Profitability, and Financial Leverage

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Author Info
Baggs, Jennifer
Brander, James A.

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Abstract

We investigate whether trade liberalization affects profitability and financial leverage, using Canadian data from the period following implementation of the Canada-U.S. Free Trade Agreement. We find that falling domestic tariffs are associated with declining profits and increasing leverage for import-competing firms, while falling foreign tariffs are associated with increasing profits and decreasing leverage for firms in export-oriented industries. This pattern is consistent with the "pecking order" theory of capital structure.

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Paper provided by Statistics Canada, Analytical Studies Branch in its series Analytical Studies Branch Research Paper Series with number 2005256e.

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Date of creation: 22 Jun 2005
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Handle: RePEc:stc:stcp3e:2005256e

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Keywords: Business performance and ownership; International trade; Financial statements and performance; Business adaptation and adjustment; Trade patterns;

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  19. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August. [Downloadable!] (restricted)
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    Other versions:
  29. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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