Excess Growth And Corporate Financial Risks

In the lack of consistency with its established financial policies,unrestrained growth may not be sustainable for a company.The purpose of this paper is an attempt to find the possible relationship between a company's high growth and its potential financial risks.We first presented a theoretical model trying to describe the stylized fact that at the time of expansion,many listed companies tended to rely heavier on debt funding to increase their capital expenditure,which would in fact, expose themselves to higher financial risks.The simple model interprets to us the fact that if corporate financial risk is taken into account,the exact sustainable growth rate a company can afford should be lower than its actual growth rate and the excess growth is nothing but a mere "illusion".A Limited Dependent Variable Model(LOGIT) is developed in SectionⅡand a sample of panel data from the auto industry specifically was utilized to test our two hypotheses.It is proved by the empirical results that the higher financial risk exposure of a company could be explained by its excess growth rate years ago.However,it is difficult for us to prove that the vulnerability of a company's performance in the subprime mortgage crisis time is a significant result from its excess growth earlier.Account receivables ratio,export proportion,and company size may play more important roles in this case.