Sustainable Growth of Nonfinancial Firms: An Empirical Examination of Emerging Economies

Muhammad Mubeen,Mansoor Ahmed,Athar Iqbal,Kashif Arif

doi:10.52633/jemi.v3i2.76

Abstract

The classic model of sustainable growth presented by Higgins is extensively used in accounting and finance research. This research empirically examines this model which was suggested to be underestimated in the existing literature. The investigation was performed using data from 2000 to 2015 for seven emerging countries. To find out the mean difference in growth between secondary equity issuing firms and non-issuing firms, we used an independent sample t-test. To identify the factors affecting differences in sustainable growth and realized growth, regression analysis was performed and a panel of seven countries for sixteen years data was used to estimate the panel regression. The study found the Higgins’ model to be underestimated. One of the main factors of underestimation of the model was found to be the secondary equity issue. This factor was observed to be significant in the case of five countries i.e. Pakistan, India, Korea, Indonesia and Brazil while the same was found insignificant in Turkey and China. Also during the examination, firm-specific factors that are important for the underestimation of the SGR (Sustainable Growth Rate) model were detected which include leverage and size, whereas dividend policy and profitability gave mixed results. Our study suggests that firms with secondary equity issues are more likely to have sustainable growth than firms not having secondary equity issues.

Highlights

Future goals’ setting regarding the financial process and activity is done by using the concept of financial planning
Chen et al (2013) ideally demonstrated that the Sustainable Growth Model of Higgins is underestimated as well as they prove that the issue of secondary equity has a positive impact on a firm’s growth which was not considered in Higgins Model
Stock pricing is performed by using the growth model by Gordon and in corporate finance, the sustainable growth of firms is computed by the Higgins model

Summary

Introduction

Future goals’ setting regarding the financial process and activity is done by using the concept of financial planning. Policies must be established and the finance manager may face critical situations while making policies for the future. It is a common practice for a finance manager to set a higher goal for the growth rate of a firm but excessive growth rate creates financial misery for businesses. If a firm fails to manage its growth rate it leads them to become a burden, facing high costs with financial losses which reduces the share price because of its negative image in the market (Fonseka et al, 2012). It can be stated that at a certain level growth rate helps a firm and beyond that, it starts showing a negative impact on the firm (Higgins, 1977)

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