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Trade Liberalization, Profitability, and Financial Leverage

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  • Baggs, Jennifer
  • Brander, James A.

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.

Suggested Citation

  • Baggs, Jennifer & Brander, James A., 2005. "Trade Liberalization, Profitability, and Financial Leverage," Analytical Studies Branch Research Paper Series 2005256e, Statistics Canada, Analytical Studies Branch.
    • Handle: RePEc:stc:stcp3e:2005256e
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