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Profitability and capital structure: Evidence from import penetration

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  • Xu, Jin

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.

Suggested Citation

  • Xu, Jin, 2012. "Profitability and capital structure: Evidence from import penetration," Journal of Financial Economics, Elsevier, vol. 106(2), pages 427-446.
  • Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:427-446
    DOI: 10.1016/j.jfineco.2012.05.015
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    4. Mohammad M Rahaman, 2016. "Chinese import competition and the provisions for external debt financing in the US," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 47(8), pages 898-928, October.
    5. Giannetti, Mariassunta & Yu, Xiaoyun, 2017. "Adapting to Radical Change: The Benefits of Short-Horizon Investors," CEPR Discussion Papers 12021, C.E.P.R. Discussion Papers.
    6. Tong, Hui & Wei, Shang-Jin, 2014. "Does trade globalization induce or inhibit corporate transparency? Unbundling the growth potential and product market competition channels," Journal of International Economics, Elsevier, vol. 94(2), pages 358-370.
    7. repec:eee:jfinec:v:127:y:2018:i:2:p:226-247 is not listed on IDEAS
    8. Fromenteau, Philippe & Schymik, Jan & Tscheke, Jan, 2016. "Import Competition and the Composition of Firm Investments," Discussion Papers in Economics 29654, University of Munich, Department of Economics.
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    11. Vithessonthi, Chaiporn & Tongurai, Jittima, 2015. "The effect of leverage on performance: Domestically-oriented versus internationally-oriented firms," Research in International Business and Finance, Elsevier, vol. 34(C), pages 265-280.
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    15. Liu,Tingting & Ullah,Barkat & Wei,Zuobao & Xu,L. Colin, 2015. "The dark side of disclosure : evidence of government expropriation from worldwide firms," Policy Research Working Paper Series 7254, The World Bank.
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    More about this item

    Keywords

    Expected profitability; Leverage; Import competition;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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