The Most Appropriate Sustainable Growth Rate Model For Managers And Researchers

Abstract

The objectives of this paper are to analyze whether there is a significant difference among widely used Higgins model and Van Horne model and whether these two competing sustainable growth rate models (SGR) estimate divergences in ways that are systematically related to variations in common financial characteristics. We find that Higgins SGR when used as continuous and dichotomous variables is more affected by variations in financial characteristics than Van Hornes model. This study confirms that Higgins and Van Hornes models are qualitatively and approximately the same in relation to most common financial characteristics of a firm. However, if the Higgins model is used to compute SGR, it would give higher SGR for more profitable firms than Van Hornes. A firm with higher leverage is given higher SGR in Van Hornes than Higgins. Variations of liquidity, debt maturity and financial distress are trivial in economic sense. Finally, we find that the both Higgins and Van Hornes models result in approximately same (less than 4%) loss in sample size and not induce more sample-selection bias. We suggest that Higgins and Van Hornes models are equally preferable from both the managers and researchers point of view.