Does Economic Freedom moderate the relationship between Profitability and Capital Structure?
DOI:
https://doi.org/10.51341/cgg.v26i3.3053Keywords:
Capital Structure, Profitability, Economic Freedom, Pecking Order, Trade-OffAbstract
Purpose: to analyze the effect of Economic Freedom on the relationship between Profitability and Capital Structure of companies in the Americas.
Method: descriptive, documentary research was carried out with a quantitative approach through Hierarchical Linear Modeling. Secondary company data was taken from Refinitiv Eikon, while Economic Freedom information was collected from The Heritage Foundation. The relationships were verified considering the Pecking Order Theory and Trade-Off, and the countries were also analyzed according to the institutional variable of Economic Freedom. The research population consisted of countries in the Americas, which resulted in a final sample of 4,068 companies from 2014 to 2021.
Originality/Relevance: the study shows that the Economic Freedom of countries can change companies' financing decisions.
Results: Without considering Economic Freedom, there is a positive and significant relationship between Profitability and Capital Structure, as expected by the Trade-Off, indicating that the company is moving towards a defined target of a debt/value ratio. However, when recognizing the moderating effect of Economic Freedom, this relationship becomes negative, as the Pecking Order Theory presumes, since there are lower levels of debt for the most profitable companies.
Contribution: indicates the importance of the government guaranteeing the Economic Freedom of individuals/entrepreneurs, to reduce barriers to trade, corruption, and financing, promoting political stability through governance and institutional indicators.
Keywords: Capital Structure; Profitability; Economic Freedom; Pecking Order; Trade-Off.
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