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Finance pp 159-163 | Cite as

Gearing

  • J. S. S. Edwards
Part of the The New Palgrave book series (NPA)

Abstract

The question whether a company’s choice of the proportion of debt to equity finance in its capital structure matters has involved a great deal of controversy. This choice, known as the gearing decision in the UK and the leverage decision in the USA, is widely regarded by corporate finance directors, investors, stock market participants and many others as an issue of considerable importance, yet the basic result of conventional economic theory applied to this question is that the gearing decision is irrelevant; there is no advantage to a firm in choosing one debt—equity ratio rather than another. This striking contrast between theory and practice has, of course, led to much critical examination of the assumptions of the theory, and some progress has been made in identifying ways in which gearing may matter. However it remains true that the determinants of a firm’s gearing decision, and its importance, are not yet fully understood.

Keywords

Capital Structure Financial Distress Individual Investor Bankruptcy Cost Debt Finance 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Limited 1989

Authors and Affiliations

  • J. S. S. Edwards

There are no affiliations available

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