Discuss the theoretical and practical factors that influence the level Essay

Discuss the theoretical and practical factors that influence the level of gearing and the maturity structure of debt in large qu - Essay Example In this context, borrowing has become a common method of financing for large firms, a fact that has influenced the status of these organizations as investment units. Indeed, large firms with high financial obligations, due to borrowing, are likely to be avoided by potential investors. The latter will examine each firm’s financial characteristics before deciding to invest on a particular firm. Current paper focuses on the examination of two important issues related to the debt in large firms: the factors that influence the level of gearing and the maturity structure of debt in large quoted companies are presented and critically discussed. The literature published in the specific subject is used in order to show the various implications of the above issues. It is revealed that the level of gearing and the maturity structure of debt in large quoted firms are likely to be depended on a series of factors which are not standardized. Rather the type and the power of these factors is depended on the characteristics and the rules of the local market, as influenced by the global economic trends. 2. Theoretical and practical factors that influence the level of gearing in large quoted companies Gearing is a term used in order to reflect ‘the proportion of the firm’s total assets owned by long and short – term creditors’ (Chisholm 2002, p.147). In other words, gearing shows the ability of the firm to repay its creditors, even through its assets in case of lack of cash. In the context of gearing, two are the most important factors that are expected to influence the ability of the firm to pay its creditors: the level of debt and the company’s assets. In modern firms, the level of gearing seems to be differentiated in accordance with the size of the firms. The above phenomenon can be explained as follows: in small firms, borrowing is the most common form of financing – aiming to avoid offering part of the firm’s management in order to be financed. In this context, small firms are expected to have high level of gearing. In large quoted firms, where there is no problem with giving part of the firm’s equity to third persons (the investors) for securing the necessary financing, the level of gearing is low (Walton 2000). There is also the opposite view. More specifically, Atrill et al. (2008, p.231) notes that large quoted firms are expected to have higher gearing compared to the small firms. The above view is based on ‘a report of the Bank of England regarding the financing of small businesses’ (Atrill et al. 2008, p.231). This report reveals that the level of borrowing of small firms is lower compared to that of the large firms, probably because the financing needs of large firms in the particular market cannot be covered by the capital of the shareholders (Atrill et al. 2008). Under these terms, the level of gearing in small and large firms cannot be considered as standardized. Rath er, it would be depended on the conditions and the characteristics of the local market – in the context of which the borrowing schemes available to the large firms may be more attractive compared to those offered to small firms, a fact that would minimize the level of gearing in small firms and maximize the level of gearing in large firms. In accordance with Chisholm (2002), normally, the level of debt of firms is lower from their equity