Credit Market Freedom and Corporate Decisions in North America

Despite the extensive empirical evidence of a positive impact of economic freedom on economic growth, the influence of economic freedom and its components on a firm’s level of cash, leverage and investment remains an unexplored issue in microeconomics and corporate finance research. In this study, we contribute towards filling this gap by examining whether Credit Market Freedom — an important component of the Economic Freedom Index — influences corporate decisions. In particular, we study whether and to what extent Credit Market Freedom affects a firm’s target level of investment, cash holdings, and leverage. We observe the behaviour of a large and heterogeneous sample of North American non–financial firms over the period 2000–2019. Our empirical results suggest that higher Credit Market Freedom is associated with a healthier corporate capital structure, higher financial flexibility and a friendlier investment environment.