Jon Tucker, John Pointon and Moji Olugbode
The purpose of this study is to investigate the incidence of target gearing behaviour in firms as well as the drivers of such behaviour.
Abstract
Purpose
The purpose of this study is to investigate the incidence of target gearing behaviour in firms as well as the drivers of such behaviour.
Design/methodology/approach
The paper employs a triangulation approach across three methodological phases: a questionnaire survey, logistic regression modelling of firm data, and interviews with finance directors. The results are then discussed under the key themes of gearing optimality, valuation issues, external drivers, the finance life‐cycle, the impact of risk, and the relationship between gearing and corporate strategy.
Findings
The results reveal that the majority of firms engage in targeting, though targets are subject to fairly frequent revision as both external and internal drivers evolve. Important external drivers include macroeconomic variables and analysts' views, whereas important internal drivers include income gearing and profitability.
Practical implications
Given the range and variety of drivers, target gearing evidently represents a complex strategic decision for finance directors. The paper provides a benchmark perspective for finance directors when determining their firm's gearing strategy.
Originality/value
The innovation of the paper is the study of target gearing across three methods, the results of which are then triangulated to provide a deeper understanding of both the quantifiable and qualitative drivers of gearing. This provides a far broader insight into the real‐world determination of gearing strategy than a conventional empirical approach.