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Strategic Accounting Problem of Capital Gearing in Croatia

The paper evaluates advantages and disadvantages of different gearing levels for the company. The relationship of cost of capital to gearing is discussed from the traditional point of view as well as Modigliani and Miller's view The debate will be extended to the choice of capital gearing type that bests fits the company's assets structure, e.g. its tangibility, growth opportunities, size, profitability and other potential variables of influence on gearing level. The problem of gearing becomes even more complex considering specific circumstances in transition economies like Croatian. The turbulent transition environment has a particular impact on business and financial risk in relation to the rate of return. So, the research tries to determine the existence of variables of influence on gearing level in Croatian enterprises in comparison with developed economies. It is based on the random sample of 140 enterprises in Croatian manufacturing industry in the second half of nineties. The analysis comprises variables of influences that are already determined by the research of Rajan and Zingales (1995) and Bevan and Danbolt (2000) and now tested on the sample of Croatian companies. The intention is also to identify new variables and relations that are specific for the economy in transition like Croatian. Since there's a great part of short-term debts that cause overdebtness, the analysis of gearing in Croatian enterprises is extended by this component besides long-term debts. The problem of gearing is a problem of particular importance for strategic management in Croatia since overdebtness is one of the strongest surviving and development constraints of Croatian enterprises. So, strategic accounting needs to produce the high quality information on this problem for management to deal with it in the most effective and efficient way that is possible.

gearing; capital structure determinants; financial management; strategic accounting

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