International Business & Economics Research Journal – April 2012 Volume 11, Number 4 © 2012 The Clute Institute 407 NAFTA Effect On Company Values And Performance Sergiy Rakhmayil, Ryerson University, Canada Ayse Yuce, Ryerson University, Canada ABSTRACT This paper examines the long-term affect of NAFTA on company performances in Canada, Mexico, and the U.S.A. Our main focus is to study the impact of the liberalization process on various aspects of performance, including profitability, operating efficiency, investment, output, employment, leverage, and firm valuation. We discover that output, profitability and efficiency increased in all three countries, and other effects are country-specific. Overall, we find that NAFTA affected companies in the three countries positively and their profitability and efficiency increased which led to value increases. Keywords: International Trade Liberalization; Firm Performance; NAFTA INTRODUCTION he North American Free Trade Agreement implemented in 1994 offers a unique chance to study the effect of liberalization on company performances in all three participating countries, Mexico, U.S.A and Canada. Proponents of free-trade agreements argue that NAFTA should increase trade among three countries, increase competition and create benefits for both the consumers and the companies by reducing tariffs and regulations and making markets accessible for all companies in three countries. On the other hand, opponents fear that small and medium size local companies will suffer because they cannot compete with large multinational companies without protection provided by their governments. The purpose of this paper is to examine the long-term affect of NAFTA on company performances in the three countries. It has been more than a decade after administrations of three countries ratified the NAFTA agreement, and several prior studies have investigated this subject using different methodologies and country samples with mixed evidence. Our study adds to this literature by analyzing changes in financial and operating performance, as well as changes in firm valuation, for public companies in Mexico, U.S.A and Canada using annual data from 1993 to 1997. Our main focus is to study the impact of the liberalization process on various aspects of performance, including profitability, operating efficiency, investment, output, employment, leverage, and firm valuation for corporations in North America. In particular, we investigate whether the liberalization increased firm performance and firm valuation by conducting nonparametric tests for changes in distribution parameters of performance measures before and after the introduction of NAFTA. Our study makes the following contributions to the literature. Whereas a large number of studies have examined the capital market implications of NAFTA using cointegration and event study analysis of stock returns, we are aware of only one other study of firm financial and operating performance by Baggs, and Brander (2006), who investigated the effect of trade liberalization on firm profitability and financial leverage in Canada. Analysis of financial and operating performance is important because it allows us to understand the intrinsic company value and is free from investor expectations. Our study differs from the previous research in that we analyze the whole range of performance aspects, including profitability, efficiency, investment, output, employment, leverage, dividends, and company valuation. Next, to the best of our knowledge, this is the first study to conduct the analysis of firm performance for all three countries participating in NAFTA: Canada, Mexico, and the USA. T