Which Sustainable Growth Rate (SGR) Estimator is Better for Managers and Researchers1?

The objectives of this paper is to analyze whether there is a significant difference among widely used Higgins, Van-Hone’s and newly introduced Huang-Liu SGR models and whether these three competing SGR estimates diverge in ways that are systematically related to variations in common financial characteristics. We find that Higgins and Huan-Liu SGR when used as continuous and dichotomous variables are more affected by variations in financial characteristics than Van-Hone’s model. The test of divergences reveals that profitable firms with adequate cash which invest on fixed assets and pay more tax give higher SGR by Higgins than Van-Hone’s. However, a large firm with high leverage gives less SGR by Higgins than Van Hone’s model. Further, we find that more profitable firm with efficient working capital management, effective investment on fixed assets and pay more tax gives higher SGR by Higgins than Huang-Liu model. We also find that more profitable large firm with high leverage, efficient working capital management and investments on fixed assets gives higher SGR by Van Hone’s than Huang-Liu model. Variations of liquidity, debt maturity and financial distress are almost trivial in an economic sense. From the researchers’ point of view, if both continuous and dichotomous variables are used in the analysis, it is better to choose Van Hone’s sustainable growth. Finally, we find that the Huang-Liu model induces more sample-selection bias as a result of loss of sample size. We suggest that Higgins and Van-Hone’s models are preferable both managers and researchers point of view.