Impact of financial leverage on the growth

of the US high-tech firms

Abstract
From this research, we will be able to examine the effect of Financial Leverage in the actual
development of US high-tech companies. It indicates that the financial leverage is positively
related to the economic power significantly and that the positive influence on over-speeding
companies is considerably stronger than for low-speeding companies. The research tests the
strength of these results using alternate empirical representations using an instrumental variable
approach in dealing with the endogeneity problem inherent in the association between financial
leverage and actual growth rate.

Keywords: financial leverage, actual growth, US high-tech firms

1. Introduction

Financial leverage impact on the actual growth rate is a central issue in corporate finance. There is
a general perception that a relationship exists between financial leverage and the performance of
the companies. (Akhtar et al., 2012)The actual growth rate is an essential aspect of financial
performance. Therefore, the relationship between financial leverage and real growth needs to be
taken into account in recent years. In this study, we explore the relationship between economic
power and substantial growth, especially for US high-tech companies. The empirical results show
that there exists a positive relationship between financial leverage and the actual growth rate
significantly. For different kinds of companies, the connection shows the heterogeneity;
specifically, the positive influence on over-speeding companies is considerably more substantial,
compared with that for low-speeding companies. Also, the research tests the strengthens of these
outcomes with the help of alternate empirical models and also uses an instrumental variable
approach in dealing with the endogeneity problem inherent in the correlation between financial
leverage and actual growth rate. The conclusion is that economic power has a positive influence
on the financial leverage significantly and that the positive effect on over-speeding companies is
considerably stronger than for low-speeding companies. It is elusive for high-tech companies to
allocate their proportion of debt.

High-tech companies, the abbreviation of high technology companies, refer to the development in
new fields through science and technology or scientific inventions, or similar operations with
innovations in existing areas. Based on defining the scope of unique and high technology
industries, the concept of high-tech enterprises can be defined in the Measures for The

1
Identification and Administration of New and High Technology Enterprises revised and issued by
the state. In the US, therefore, a high-tech enterprise generally refers to the government
promulgated the "national key high-tech fields of support within the scope of ongoing research
and development and transformation of technical achievements. Forming enterprise core
independent intellectual property rights. on this basis to carry out the business activities of
resident, is a knowledge-intensive and technology-intensive economic entity."

According to the National Science Foundation, there is no single preferred method for identifying
high-technology companies. It is most frequently assumed that the high technology sector
represents the industries, which are generated at the meeting point of science and industry, and
which are based on the processing of scientific research results in the industry. OECD
(Organization for Economic Co-Operation and Development) methodology is applied for the EU
country's statistics of economic sectors, based on a sectoral approach by economic sectors
(ISIC/NACE) and product approach by product groups (SITC) (OECD,2018; Wood, 2002). In
both systems, the main factor deciding whether a given sector or product is perceived as a high
technology one is the assessment of the intensity of R&D expenses. High technology is a relative
category in such an approach. It encompasses sectors or products which fulfill specific
quantitative criteria in a given period, contrary to such industries or products which do not meet
such standards. It should be noticed that the literature on the subject enumerates, apart from the
R&D intensity indexes, several other measures that enable identification of high-technology
sectors, e.g., the involvement of science and technical personnel, the number of obtained patent
rights or signed license agreements. The horizontal approach perceives the high technology sector
from the science perspective (Perspektywy,2006). For example, the biotechnology, defined as a
high-tech sector, is characterized by a high share of R&D expenses on the one hand. Still, on the
other hand, its commercial applications can be found in many different industries, both low
technology and high technology. This approach emphasizes the technologies which have become
the basis for a brand-new economic infrastructure. These are often essential technologies, with the
possibility of long-term and diverse development potential. This approach, similar to the high
technology definition in Japan (Perspektywy,2006), identifies technology bundles rather than an
independent, isolated technology, even if it displays high R&D expenditure intensity.
Moreover, new technologies differ from traditional ones due to the presence of stochastic,
continuous, and abstract events (Weick, 1990). Highly advanced technology does not require
efficiency management, which involves productivity, quality, and motivation improvements. Still,
it changes managers into the so-called change catalyzers, whose aim is to activate and support the
introduced improvements and self-management related to hierarchy dispersion and the use of
organizational and leadership skills.

High-tech companies have many characteristics which are unlike the other companies. Firstly,
high-tech companies are different from public enterprises. Most of them have research results first
and then establish enterprises to realize the commercialization of technology. Therefore, many
high-tech enterprises often become the pioneers of high-tech industry development. Secondly,
private high-tech enterprises are generally small and medium-sized enterprises or emerging
companies in the initial stage. It has more flexibility, and they can develop new products very
quickly by using modern technology and the latest inventions. Many venture capitalists are willing
2
to invest in such immature companies because of their small start-up scale, low investment, and
limited risk. Thirdly, the precondition for the existence of high-tech enterprises is the innovation
of science and technology. Without the invention and creation of science and technology, high-
tech enterprises will lose the foundation of reality. Therefore, high-tech companies are more
produced in countries and regions with advanced science and technology. The developed system
of science and education and the system of scientific and technological personnel choosing their
job freely are the critical conditions for the development of high-tech enterprises. Fourthly, the
high-speed growth is an essential characteristic of high-tech enterprises. As long as the enterprise
can develop new products to meet the needs of the market, the high-tech products with their
novelty and high-tech characteristics can quickly occupy the market, to obtain great economic
benefits, and then within a few years from the original small companies to develop into the
organization and management of the increasingly perfect large companies. The key to the success
of high-tech enterprises is the quality of the enterprise's leadership team. In the course of high and
new technology enterprise full of risks and hardships, only first-class high-quality leadership team
unity, continuous innovation can ensure the development of the enterprise. Venture capitalists
always focus on the ability and quality of the leading group when evaluating high-tech enterprises,
including network companies. Besides, what is often not taken seriously is the high risk of high-
tech enterprises? High-tech enterprises are engaged in technological commercialization activities
based on new inventions and new creations in science and technology, so it inevitably has the risk
of development failure. The great success of 20% to 30% of high-tech enterprises comes at the
cost of 70% to 80% of enterprises' failure. The plunge in NASDAQ market network valuation in
April 2001 fully illustrates this characteristic.

High financial leverage is one of the essential characteristics of high-tech companies. Since the
part is usually a fixed expense, leverage magnifies returns and EPS. This is good when operating
income is rising, but it can be a problem when operating income is under pressure. It is invaluable
in helping a company assess the amount of debt or financial leverage it should opt for in its capital
structure. If operating income is relatively stable, then earnings and EPS would be durable as well,
and the company can afford to take on a significant amount of debt. However, if the company
operates in a sector where operating income is quite volatile, it may be prudent to limit debt to
easily manageable levels. The use of financial leverage varies significantly by industry and by the
business sector. There are many industry sectors in which companies operate with a high degree of
financial leverage. Retail stores, airlines, grocery stores, utility companies, and banking
institutions are classic examples. In this paper, we mainly focus on high-tech companies, which
have more immense financial leverage than most other industries. In this paper, we use the
percentage of Shareholders' equity to total assets to represent the financial leverage for high-tech
companies. In the robustness test part, the gearing ratio is employed to describe the financial
power.

3
2. RELATED LITERATURE AND HYPOTHESES

2.1 The source of firm growth

The source of firm growth is multi-factor. Smith, the founder of classical economics, believed that
the division of labor and economies of scale are the fundamental driving forces for the change and
economic development of companies. Smith found that the division of labor could increase labor
productivity, and companies could get higher yields at lower costs. Besides, the number of firms in
a country's economy is positively correlated with the degree of division of labor. At the same time,
he believes that the company exists and grows in a particular market scope, so the boundary of the
market scope determines the company size. However, there is a flaw in Smith's theory that he has
a vague understanding of the relationship between the general division of labor in society and the
particular division of labor in companies, and he does not consider the environmental factors that
affect the growth of companies. While insisting that the development of companies depends on
economies of scale, Marshall believes that the factors that affect the growth of companies are in
motion, not static. By introducing the external economy, entrepreneurs, finiteness, and life in the
monopoly company these three factors, the stable equilibrium conditions with the classical
coordinate company growth theory, Marshall concluded the view the external economy and
internal economy to promote the growth of the company is the key to the company operators,
namely entrepreneur company into a long is the result of competition under the action of
evolution. The expansion of scale leads to a decrease in operational flexibility, thus reducing the
competitiveness of the company. Marshall's research on the theory of corporate growth initially
introduces the issue of corporate development into the track of management research and expands
the perspective of corporate growth research. Gibrat (1931) put forward the theory of company
growth, then walk the approach, also known as the law. According to this theory, exogenous and
random external turbulence is often the main driving force for the company's continuous growth,
and the company's growth process is also non-continuous and spontaneous, and the process is non-
simulated and non-repeatable. Through the empirical study, it is concluded that the growth of
companies is not related to the Size of companies. Smets and Hart (1960) point out that if the
random walk theory is useful, the growth rate of companies will be independent of the Size, and
companies of different sizes will grow randomly. Large companies have high growth potential,
mainly due to their large scale, which leads to the improvement of industry concentration, which
does not meet the reality. Neoclassical economics studies the reasons for the growth of companies
from the perspective of technology and believes that the pursuit of economies of scale and
economies of scope is the fundamental driving force for the development of companies.
Neoclassical economics makes an in-depth analysis of economic behavior, motivation, and
performance that affect the growth of companies from the perspective of individuals. It introduces
the hypothesis of economic man, assuming that companies are self-interested rational people and
follow the principle of profit maximization to organize and operate. The assumption is that the
company is a simple "black box," a basic unit equivalent to the consumer's pursuit of profit
maximization under market and technical constraints. Neoclassical economics assumes that the
fundamental factors affecting the growth of a company are exogenous, so a company can only be

4
regarded as a production function, and its growth process is the process of pursuing the optimal
scale. Neoclassical economics believes that the boundaries of a firm's growth are entirely
determined by external conditions and ignores its capabilities.
Hypothesis 1: the impact of financial leverage on the actual growth rate for over-speed growth is
more significant than that of non - speeding growth companies.

2.2 The over-speeding firms

Besides, we assume that the influence of financial leverage on the actual growth rate is different.
For over-speeding growth companies, the higher economic power is a useful way to gain the
funds, and its profit-gaining ability could support its business operation. Still, for non-speeding
companies, the higher financial leverage means higher debt, sometimes it could not afford the
interest and will go to bankruptcy. Therefore, we come out with the other two hypotheses to show
the heterogeneity of these two different companies.

Schumpeter was the first economist to break the framework of neoclassical economic theory and
successfully explain the active role of the company's own ability in the process of company
growth. Neoclassical economic theory holds that the essence of market competition is price
competition, and the market competition mode can be divided into three types according to the
intensity of price competition: perfect competition, monopolistic competition, and monopoly. The
ideal match is the market mode with the highest resource allocation efficiency. Schumpeter
rejected this dogma of neoclassical economics and redefined the nature of competition. In his
opinion, the essence of market competition is not merely price competition, but innovation
competition within the company and the latter is much more important than the former. The
company's profit comes from innovation, and the monopoly profit brought by design is a
necessary condition for the company to maintain its innovation ability. The driving force for the
long-term growth of a country's economic aggregate comes from the large monopolistic
companies, rather than the small ones under the condition of perfect competition advocated by the
neoclassical economic theory.
Schumpeter's theory changed the basic view of the driving force of economic growth,
emphasizing that the continuous innovation activities of companies themselves promoted the
constant development of the economy. Berle and Means (1932) point that after the separation of
ownership and management, with the prosperity of the securities market, the company's equity
gradually dispersed to a large number of minority shareholders and the company's control is in the
hands of the operator, forming a typical principal-agent relationship. At this time, managers tend
to use corporate resources to maximize their interests rather than the interests of shareholders, so
they cannot maximize the value of the company and thus reduce the growth of the company. The
more dispersed the ownership structure, that is, the lower the ownership concentration, the lower
the adequate supervision of the principal to the agent, and the lower the degree of corporate value
maximization. Solvay and Sanglier (1998) believed that the long-term tendency of technological
advancement and the short-term demand fluctuations caused by business cycle variations
determine growth in a company. Among them, technological progress increases the company's
potential production capacity, and the short-term instability of demand determines the company's
5
investment range to obtain this potential output. The short-term fluctuation of the market can
affect the play and utilization of a company's production capacity, thus determining the amount of
surplus that a company can invest in improving its production capacity in the next period. The
company's technological progress comes from the experience effect and the innovation effect. The
experience effect refers to the accumulation of long-term production capacity by all the employees
of the enterprise.
In contrast, the innovation effect refers to the improvement and improvement of production
capacity generated by all the investment in research and development of the enterprise. In the long
run, innovation and learning are the driving forces to improve a company's productivity and
growth potential. Hansen and Clemen (2001) believe that the growth of the company is
significantly related to the operator's strategic choice. In a nutshell, managers of high-growth
companies tend to be more enterprising and willing to make sacrifices for the development of the
company, pay more attention to product quality and reputation, develop the market and carry out
technological innovation as the strategic day for appropriate investment and have a strong
leadership team, etc. in this paper, we focus on the financial leverage and to explore whether the
financial leverage is also a source of firm growth for US high-tech companies.

The impact of financial leverage on the actual growth rate is an important issue, both for investors
and company holders. The growth of a company is related to its managers and investors. The
common concern of stakeholders is also the future value of the company throughout the year. The
growth of the company needs financial support for the growth of the company, and there is an
internal relationship between financial leverage, then financial influence on the company. What
role does development play? At present, the most existing research literature believe that
economic power harms a company's growth, so why are some public companies so successful
with their finances, and has leverage achieved steady growth is the issue this paper aims to work
out. Many scholars have done a lot of empirical research on the development of companies, and
the main conclusion is that financial leverage is negatively correlated with the development of
companies. Myers and Turnbull (1977) believe that the company's high debt ratio will increase the
risk of bankruptcy accordingly. Once a default occurs, the company will completely lose growth
opportunities. However, when companies have more growth opportunities, they will adopt more
conservative financial leverage policies. They predict that there is a negative relationship between
growth opportunities and debt ratio (Myers and Turnbull,1977). Myers (1977) believed that
companies in the growth stage have more choices for future investment opportunities. However,
due to the liability agency problem, they speculate that the liability ratio should have a negative
relationship with the company's growth (Titman and Wessels, 1988). However, the empirical
results show that the inverse relationship between debt ratio and development is not significant.
Lang (1996) 's researches on leverage, investing, and corporate growth displays that leverage does
not slow the growth of companies with profitable investment opportunities; However, when a
company's growth opportunities are not recognized by the capital market or the value of its growth
opportunities is insufficient to overcome the impact of risks and costs caused by high debt,
financial leverage is negatively correlated with the company's growth.

Hypothesis 2: for over-speed growth companies, the higher the actual growth rate, the greater the
financial leverage;
6
2.3 non -speeding firms

However, other scholars think the positive impact exists between the financial leverage and firm
growth; that is, the higher economic power could increase the actual growth rate for companies.
Kraus and Litzenberger (1976) point out that the financial leverage will bring tax shield income
(tax exemption from interest) to the enterprise, thus increasing the value of the enterprise.
However, too high economic power will increase the probability of bankruptcy, resulting in
bankruptcy costs. Therefore, the value effect of financial leverage depends on the comparison
between tax shield earnings and bankruptcy costs. Wang H (2003) observed the positive impact of
corporate debt on corporate value. The research shows that the debt level of a company has a
significant positive explanatory power on Tobin's Q value, price-to-book ratio, and return on
equity. Still, for a small number of companies with a very high asset-liability rate, this effect is not
significant. Lu C and Wang K (2002) studied the interaction mechanism among financial leverage,
dividend distribution, and managerial ownership ratio of listed companies in the US. The
empirical study shows that the economic power of listed companies has a significant positive
correlation with corporate performance and growth. This indicates that high performing
companies in the growth stage with gradually expanding asset scale are good at exerting financial
leverage effect.

Hypothesis 3: for non-speeding growth companies, there is no significant correlation between the
actual growth rate and financial leverage.

3.Research Methodology

3.1 Data and Variables

In this paper, the high-tech companies from 2010 to 2019 are selected as data samples, and the
examples with missing and incomplete data are eliminated. All the control variables are insured by
1% at both sides. After the cleaning steps, there are 1231 unbalanced panel data left in the sample,
including 151 US high-tech companies during 2010 and 2019. In the disciplines of econometrics
and statistics, panel data refers to multi-dimensional data that generally involves measurements
over some time. As such, panel data consists of the researcher's observations of numerous
phenomena that were collected over several periods for the same group of units or entities. For
example, a panel data set may be one that follows a given sample of individuals over time and
records observations or information on each individual in the model. There are two distinct sets of
information that can be derived from cross-sectional time-series data. The cross-sectional
component of the data set reflects the differences observed between the individual subjects or
entities, whereas the time series component, which reflects the differences observed for one issue

7
over time.

It can be seen from the research on the relationship between financial leverage and corporate
growth by scholars at home and abroad that the credibility of the research results is affected to
different degrees due to the other variables selected to measure corporate development and the
various samples and research methods, leading to inconsistencies in the research results. Besides,
this study takes the corporate financial performance index as the evaluation index of corporate
performance. Economic indicators fail to reflect the impact of risk structures (especially financial
risks caused by corporate liabilities) and may lose objectivity and authenticity due to earnings
management by corporate management. Besides, part of the study selected too few samples or a
lack of representativeness in the industry. Moreover, some studies did not control for other specific
factors that affect company performance (such as firm size, asset structure, ownership structure,
and industry attributes). The defects of these research methods jeopardize the reliability of
measurement results to varying degrees.
As we mentioned before, we assume the high financial leverage could lead to an increased growth
rate for US high-tech companies. Specifically, we define the variable of sustainable growth rate as
below:
Sustainable growth rate (SGR) = net profit rate of sales × total asset turnover rate × retained
earnings rate × asset equity rate
Actual growth rate (g) = (primary business income of this year-main business income of last
year)/main business income of the previous year
When the actual growth rate (g) of an enterprise exceeds the sustainable growth rate (SGR), it is
speeding up. When the real growth rate of an enterprise is less than or equal to the sustainable
growth rate (SGR), it is non-speeding growth
To verify the three hypotheses proposed in this paper, we need to group the samples as follows.
Sample group 1: cross-section data of all sample companies from 2010 to 2019 are recorded as G-
M; Sample group 2: the cross-sectional data of all the sample companies with excessive growth
from 2010 to 2019 are recorded as HG; Sample group 3: cross-section data of all non-Overspeed
growth sample companies from 2010 to 2019 are recorded as NHG

The growth of enterprises will inevitably lead by high financial leverage, while leverage will
reduce the growth of corporate finance through liquidity effect, thereby increasing financial risk
(Myers, 1997). According to the sustainable growth rate given by Robert C. Higgins (1977), the
growth beyond this speed is called super growth. Hyun Han Shin and Ren é M. Stulz (2000)
decomposes the value of a company into the cost of assets and the amount of change. Through
empirical research, it is found that a reasonable growth rate can bring the growth rate of asset cash
flow for enterprises; The growth beyond the likely growth rate (i.e., over-speed change) will not
only not increase the enterprise value, but also cause the enterprise to fall into financial crisis and
damage the enterprise value. The author believes that the company's economic leverage effect is
double, both the positive side also has the opposing side. Under the different financial situation of
the company, the influence of financial leverage on corporate growth will show other forms, only
performance company can give full play to its positive financial power, and poor performance of
the company it is hard to play the role of economic power. Therefore, this paper takes the growth
8
of the company as the explained variable, selects long-term, extensive sample data, and
systematically studies the influence of financial leverage on the development of the company
under different operating performance conditions.

3.2 Measures

The dependent variable is the actual growth rate of US high-tech companies. Whether the business
is growing or not is an important fact, but understanding how fast its growth can be hard to nail
down. As we saw with our investigation of churn, it can be hard even to define a simple metric
like growth and even harder to calculate it. So how fast is your business growing? The growth rate
is an essential metric for allocating your resources in the future. Suppose your business grows
more quickly than you can handle. Growth rates can be beneficial in assessing a company's
performance and to predict future performance. The actual growth rate in this paper is defined as
the (primary business income of this year-main business income of last year)/main business
income of the previous year. The independent variable of this paper is the financial leverage,
which is defined as the shareholders' equity to total assets.

The independent variable is the financial leverage, which is also known as leverage or trading on
equity, which refers to the use of debt to acquire additional assets. The use of economic power to
control a more incredible amount of assets (by borrowing the money) will cause the returns on the
owner's cash investment to be amplified. That is, with financial leverage: an increase in the value
of the assets will result in a more massive gain on the owner's cash when the loan interest rate is
less than the quality of increase in the asset's value, a decrease in the value of the assets will result
in a more extensive loss on the owner's cash. In this paper, we define the financial leverage as the
proportion of equity to total assets. In the robustness test, we use the gearing ratio alternatively to
demonstrate the economic power.

We also include some control variables; Size is defined as the logarithm of the company's total
assets. Larger companies are more likely and equipped to integrate vertically or diversify. Vertical
integration realizes the internalization of transactions and improves the company's operating
performance, thus contributing to the improvement of the company's intrinsic value.
Diversification may not necessarily improve the overall profitability of the company. Still, it can
spread operational risks to all the fields involved, balance the income level in different periods,
and make the company more stable. Besides, large - scale companies are also conducive to the
reasonable allocation of internal funds. Large firms operate more stably than small ones and can
expect to fail at a lower cost. Therefore, compared with small companies, big companies tend to
have a higher level of debt. In terms of debt maturity structure, big companies tend to have a more
significant proportion of long-term debt ratio, while small companies are more inclined to short-
term borrowing from Banks.

ROA that is, the return on total assets, is the net profit after tax divided by total assets. According
to the optimal order financing theory, the general order of corporate financing is to retain surplus,

9
issue bonds, and issue stocks. Thus, when a company is more profitable, it is likely to have more
of its abundance and therefore issue fewer bonds. On the contrary, if the company's profitability is
insufficient, it is impossible to keep enough surplus and can only rely on external financing.
Therefore, the ROA is an essential factor that will affect the actual growth rate of companies.

ROCE, the return on capital employed, is defined as the accounts receivable divided by total
assets. The receivables turnover ratio is an accounting measure used to quantify a company's
effectiveness in collecting its receivables or money owed by clients. The rate shows how well a
company operates and manages the credit it extends to customers and how quickly that short-term
debt is collected or is paid. The receivables turnover ratio is also called the accounts receivable
turnover ratio. A high receivables turnover ratio can indicate that a company's collection of
accounts receivable is efficient and that the company has a high proportion of quality customers
that pay their debts quickly. A low receivables turnover ratio might be due to a company having a
flawed collection process, lousy credit policies, or customers that are not financially viable or
creditworthy.

Profit Margin is defined as the proportion of net income on the total sales. Profit margin is one of
the commonly used profitability ratios to gauge the degree to which a company or a business
activity makes money. It represents what percentage of sales has turned into profits. Simply put,
the percentage figure indicates how many cents of profit the business has generated for each dollar
of purchase. While proprietary companies, like local shops, may compute profit margins at their
own desired frequency (like weekly or fortnightly), large businesses, including listed companies,
are required to report it following the standard reporting timeframes (like quarterly or annually).
Companies that may be running on loaned money may be required to compute and register it to
the lender (like a bank) every month as a part of standard procedures.

In the robustness test, we choose the gearing rate to measure financial leverage, which is denoted
as variable GEA. The gearing ratio is a detector of financial leverage, which shows the rate to
which a company's activities are financed by equity capital versus debt financing. A more
significant gearing ratio proves that a firm has a higher percentage of financial leverage and will
be more prone to recessions in the economy and the business sequence. The reason for this is
because firms with higher power attract a higher amount of debt about shareholders' equity.
Bodies with a higher gearing ratio pose higher volumes of debt to repay. In contrast, on the other
hand, firms with lower gearing ratio figures have better equity to depend on for financing.

The table1 below helps in definitions, which include variable, symbol, definition method, and the
calculation methods.

Table 1. variable definition

Symbo
Variable Variable Definition Calculation Method
l
Explained g Actual growth rate (primary business income of this
variable year-main business income of last

10
 year)/primary business income of
the previous year
explanatory
LEV Financial leverage Shareholders' equity to total assets
variable
Take the logarithm of the
SIZE Size company's total assets as the
company size
controlled Net profit after tax divided by total
ROA Return on total assets
variable assets
Accounts receivable divided by
ROCE Return on capital employed
total assets
PM Profit Margin Net income/Sales

The summary statistics are shown in Table 2 below.

Table 2. Summary statistics

N Mean Std. Dev. min max
g 1231 1.283 1.204 -0.384 2.394
HG 1231 0.193 0.314 0 1
LEV 1231 0.403 0.319 0.023 6.016
SIZE 1231 0.178 0.02 0.12 0.233
ROA 1231 0.011 0.143 -0.877 0.842
ROCE 1231 0.021 0.208 -1.963 0.84
GEA 1231 0.51 0.772 0 9.347
PM 1231 0.043 0.195 -0.991 0.917
The sample consists of all high-tech firms in the US from 2010 to 2019, the models with missing
and incomplete data are eliminated; there are 1231 samples remained in the end.

According to Table 2, the mean of actual growth rate is 1.283, and the standard deviation of the
real growth rate is 1.204, so the dispersion of the actual growth rate of US high-tech companies is
extensive. The mean of over-speeding growth company identifier is 0.193, and this means the
19.3% of the US high-tech companies are over-speeding companies. This proportion is not very
high. And the standard deviation of the over-speeding growth company identifier is 0.314. The
mean of the financial leverage is 0.403, and the standard deviation of the financial power is 0.319.
The norm of Size is 0.178, and the standard deviation of the Size is 0.02, so the dispersion of the
assets of the US high-tech companies are small. The mean of ROA is 0.011, and the standard
deviation of ROA is 0.143. The norm of ROCE is 0.021, and the standard deviation of the ROCE e
is 0.208. The mean of the gearing ratio rate is 0.51, and the standard deviation of the gearing ratio
is 0.772. The norm of profit margin is 0.043, and the standard deviation of the profit margin rate is
0.195.

11
4.RESULTS

4.1 Baseline specification

We estimate a multiple ordinary least square equation to test whether the impact of financial
leverage on the actual growth rate for high-tech companies with over speed growth is more
significant than those with non - speeding development.The specification of the equation is shown
as the following equation:
HGi ,t    1 LEVi ,t -1   2 SIZEi ,t  3 ROAi ,t   4 ROCEi,t  5 PM i ,t   i ,t
(1)

HGi ,t -1 LEVi ,t
Where denotes the high-tech companies I have over speed growth at time t-1; is the

SIZEi ,t
financial leverage for the company I at year t; is logarithm of asset for company i at year t;

ROAi ,t ROCEi ,t
is return on total assets for company i at year t; is return on capital employed for

PM i ,t  i ,t
company i at year t; denotes profit margin for company i at year t. is the error term in the
equation.
Table 3. Pairwise correlations
Variables (1) (2) (3) (4) (5) (6)
(1) HG 1.000
(2) LEV 0.085 1.000
(3) SIZE -0.052 0.063 1.000
(4) ROA 0.168 -0.249 0.334 1.000
(5) ROCE 0.126 -0.219 0.377 0.926 1.000
(7) PM 0.118 -0.273 0.336 0.204 0.721 1.000

Before the regression analysis, we conduct the Pearson correlation test to test whether there is a multi-
correlative problem for the variables. The result is shown in Table 3. As shown in Table 3, all the
correlations between variables are smaller than 0.4; this suggests that there is no autocorrelation
problem; we could estimate the regression equations in the following part. Besides, the Pearson
correlation between financial leverage and the high-speeding growth rate company is 0.085, which is
positive and demonstrates the positive relationship exists between financial power and the over-
speeding actual growth rate company.

Like other kinds of literature which examine the relationship between the financial leverage and
actual growth rate, we also use the pooling regression method to estimate the equation. But none
of those literatures examines the robustness of the results using other methodologies. The
assumption of zero unobserved individual effect is too strong given that there is large

12
heterogeneity across firms, even though in the same industry. Therefore, we use a random effect
and a fixed effect model to control for individual firm heterogeneity.

To isolate which empirical methodology—random effect, pooling, or fixed effect regression—is best
suitable, we trytwo statistical tests: starting with the Lagrange Multiplier (LM) test (Breusch and
Pagan, 1980) of the random effect model. In null hypothesis the individual effect, is zero. With chi-
square figures are reported in Row 11 of the Table 4, which equate to 183.1 with p-value of 0.000.
Thus, the null hypothesis that the individual effect is zero is overruled at the 1% significance level. The
result suggests that the cohort effect is not zero and that the pooling regression is not suitable in this
case. Second, we conduct the Hausman specification test (Hausman, 1978) to choose from the
fixed effect and the random effect models. If the model is correctly specified and if individual effects
are uncorrelated with the independent variables, the fixed effect and random effect estimators should
not be statistically different. The statistics are reported in Row 11 of Table 2. As shown in Table2, the
test chi2 statistics of Hausman test is 154.9 with p-value of 0.000, which suggests that the null
hypothesis is rejected at the 1% significance level. Taken the result of LM test and Hausman test
together, the results tell us that it is the fixed effect model which is most suitable in determining the
regression comparison.

Table 4 provides the regression findings of the financial leverage on actual growth rate for high-tech
companies. There are three different models including pooling regression, fixed effect model and
random effect model. t-statistics are provided in parenthesis below the coefficient estimates. The
results show that denote variable of the high-tech companies with over speed growth has a
positive relationship on the actual growth rate at the 1% significance level. This positive
relationship between over speed growth company denote and the actual growth rate is robust for
different empirical models. The point estimations ranges from 0.0337 to 0.0698, meaning that the
actual growth rate increases about 0.0339 to 0.0698 between the gap of over speed growth
company and non - speeding growth company.

The impacts of other control variables on the actual growth rate have the expected signs: SIZE,
which measure the total asset of the company, has a significant negative impact on the actual
growth rate, which means that the actual growth rate will decrease when the total assets increase;
ROA which measure the return on total assets of the company, has a significant negative impact
on the actual growth rate, this suggest that the company with higher ROA will have the lower
actual growth rate; ROCE, which measure the return on capital employed of the company, has a
significant positive impact on the actual growth rate, this suggests that the high-tech company
with higher return on capital employed will have the more actual growth rate; PM, which measure
the profit margin of the company, has a significant positive impact on the actual growth rate, this
suggests that the high-tech company with higher profit margin will have the more financial
leverage.

According to the test results of LM test and Hausman test, the fixed effect model is the most
appropriate regression methodology for equation (1). The estimated coefficient of LEV in fixed effect
model is 0.698, which is significant at 1% significance level. This suggests that high-tech company
with over speed growth have higher financial leverage than those with non - speeding growth. This
13
result verifies the first hypothesis that financial leverage for high-tech companies with over speed
growth is greater than those with non - speeding growth.

Table 4. The impact of financial leverage the high-tech company identifier

(1) (2) (3)
Pooled OLS FE RE
LEV 0.0337*** 0.0698*** 0.0344***
(4.68) (4.94) (4.22)
SIZE -5.551*** -4.272 -5.467***
(-6.02) (-0.80) (-4.87)
ROA 0.623*** 0.00547*** 0.507***
(3.40) (3.01) (3.13)
ROCE 0.250*** 0.452*** 0.225***
(3.17) (3.61) (3.01)
PM 0.0194*** 0.581** 0.189***
(3.10) (2.37) (3.93)
LM test Chi2 = 183.1***
Hausman test Chi2 = 154.9***
Intercept 1.488*** 1.078 1.460***
(9.07) (1.12) (7.25)
N 1231 1231 1231
Adjusted r2 0.0682 0.0954 0.0396
This illustration provides the regression results of financial leverage on the high-tech company
identifier on US high-tech companies using alternative models (pooling regression, fixed effect
model and random effect model). T-statistics are provided in parenthesis below the coefficient
estimates. The Lagrangian Multiplier test (LM test) would be employed to test the random effect
model versus the pooling regression model and Hausman specification test is employed to
examine the fixed-effect model versus the random effect model.
* Significance at 10% level.
** Significance at 5% level.
***Significance at 1% level.

4.2 Heterogeneity test

We estimate a multiple ordinary least square equation in examining the effect of financial leverage
on the actual growth rate for high-tech companies with both over speed growth companies and
those with non - speeding growth. The specification of the equation is shown as following
equation:
gi ,t    1 LEVi ,t -1   2 SIZEi ,t  3 ROAi ,t   4 ROCEi ,t  5 PM i ,t   i ,t
(2)

gi ,t -1 SIZEi ,t
Where denotes the lagged actual growth rate of company i at time t-1; is logarithm of

14
 LEVi ,t ROAi ,t
asset for company i at year t; is the financial leverage for company i at year t; is return

ROCEi ,t
on total assets for company i at year t; is return on capital employed for company i at year t;

PM i ,t  i ,t
denotes profit margin for company i at year t. is the error term in the equation.

Table5. Pairwise correlations

Variables (1) (2) (3) (4) (5) (6)
(1) g 1.000
(2) SIZE 0.087 1.000
(3) LEV 0.015 0.063 1.000
(4) ROA 0.265 0.334 -0.249 1.000
(5) ROCE 0.231 0.377 -0.219 0.126 1.000
(6) PM 0.241 0.336 -0.273 0.204 0.721 1.000

Before the regression analysis, we conduct the Pearson correlation test to test whether there is multi-
correlative problem for the variables. The result is shown in Table 5. As shown in Table 5, all the
correlations between variables are smaller than 0.4, this suggests that there is no autocorrelation
problem, we could estimate the regression equations in the following part. In addition, the Pearson
correlation between financial leverage and the actual growth rate is 0.015, which is positive and
demonstrates the positive relationship exists between financial leverage and the actual growth rate.

Table 6 provides the regression results of financial leverage on the actual growth rate for high-tech
companies for both over-speeding growth companies and non-speeding growth companies. For
both subgroups, there are three different models including pooling regression, fixed effect model
and random effect model. t-statistics are provided in parenthesis below the coefficient estimates.

For over-speeding growth companies, the results show that the financial leverage has a positive
relationship between actual growth rate at the 1% significance level. This positive relationship
between the financial leverage and actual growth rate is robust for altenative empirical models.
These point figures range from 0.0718 to 0.0865, meaning that the actual growth rate increases
from about 0.0718 to 0.0865 if the financial leverage increase by 0.1. The waves of other control
variables on the actual growth rate have the expected signs: SIZE, which measure the total asset of
the company, has a significant negative impact on the real growth rate, which means that the
actual growth rate will decrease when the total assets increase; ROA which measure the return on
total assets of the company, has a significant negative impact on the actual growth rate, this
suggest that the company with higher ROA will have the lower real growth rate; ROCE, which
measure the return on capital employed of the company, has a significant positive impact on the
actual growth rate, this suggests that the high-tech company with a higher return on capital
employed will have the more actual growth rate; PM, which measures the profit margin of the
company, has a significant positive impact on the real growth rate, this suggests that the high-tech
company with higher profit margin will have the tremendous actual growth rate.

15
For non-speeding growth companies, the results show that financial leverage has a positive
relationship on the actual growth rate, but the influences are not significant. This positive
relationship between economic power and the actual growth rate is robust for different empirical
models. Also, the impacts of other control variables on the actual growth rate have the expected
signs: SIZE, which measures the total asset of the company, has a significant negative impact on
the real growth rate, which means that the actual growth rate will decrease when the total assets
increase; ROA which measure the return on total assets of the company, has a significant negative
impact on the actual growth rate, this suggest that the company with higher ROA will have the
lower real growth rate; ROCE, which measure the return on capital employed of the company, has
a significant positive impact on the actual growth rate, this suggests that the high-tech company
with a higher return on capital employed will have the more actual growth rate; PM, which
measures the profit margin of the company, has a significant positive impact on the real growth
rate, this suggests that the high-tech company with higher profit margin will have the more actual
growth rate.

For both subgroups, we also conducted the LM test and Hausman test to choose estimate methods. For
the over-speeding growth subgroup, the LM statistics are 181.2, which is significant at a 1%
significance level. So, the pooled regression method is rejected significantly. The chi2 statistics of
the Hausman test are 125.08, which is also significant at a 1% significance level. So, the random
effect model is rejected significantly. Taken together with the results of the LM test and Hausman
test, we choose a fixed effect to estimate the model. For non-speeding growth subgroup, the LM
statistics is 393.9, which is significant at 1% significance level. So, the pooled regression method
is rejected significantly. The chi2 statistics of Hausman test is 143.0, which is also significant at
1% significance level. So, the random effect model is rejected significantly. Taken together the
results of LM test and Hausman test, we choose fixed effect to estimate the model.

According to the result of fixed effect model, the estimated coefficient of financial leverage and the
actual growth rate is 0.0865 in over-speeding growth companies and the coefficient if significant at 1%
significance level. This suggests that the actual growth rate will increase when the financial leverage
increases in over - speeding growth companies. The result verifies the second hypothesis.
However, the result of fixed effect model in non-speeding growth companies show that the estimated
coefficient of financial leverage and the actual growth rate is 0.00219, but the coefficient is not
significant. This suggests that the financial leverage has no significant relationship with the
financial leverage increases in over - speeding growth companies. The estimation result could
verify hypothesis 3.

Table 6. The regression results of financial leverage on the actual growth rate
Over- speeding growth companies Non-speeding growth companies
Variables Pooled Pooled
FE RE FE RE
OLS OLS
LEV 0.0727*** 0.0865*** 0.0718*** 0.0137 0.00219 0.0182
(3.98) (3.59) (3.48) (1.27) (0.70) (1.09)

16
 SIZE -2.960*** -20.44*** -2.918*** 0.606*** 0.246 0.693***
(-3.32) (-4.01) (-3.09) (3.88) (0.18) (3.08)
ROA 0.466*** 0.347 0.415*** 0.0828*** 0.0935 0.0809***
(3.15) (0.65) (3.15) (3.08) (0.93) (3.89)
ROCE -0.0459** 0.180 -0.0159 -0.0612* -0.0322** -0.0372*
(-2.24) (0.63) (-0.24) (-1.67) (-2.60) (-1.90)
PM -0.147** -0.144*** -0.128*** 0.0316*** 0.0268*** 0.0393***
(-2.73) (-3.48) (-3.03) (3.09) (3.60) (3.89)
LM test 181.2*** 393.9***
Hausman 125.08*** 143.0***
test
Intercept 0.781*** 3.939*** 0.897*** -0.0929*** -0.0311 -0.0929***
(5.08) (4.30) (5.77) (-3.23) (-0.12) (-3.23)
N 771 771 771 550 550 550
Adjusted
0.0176 0.0224 0.0502 0.0119 0.486 0.0946
r2
This table provides the regression results of financial leverage on the actual growth rate on US high-
tech companies using alternative models (pooling regression, fixed effect model, and random
effect model). T-statistics are provided in parenthesis below the coefficient estimates. The
Lagrangian Multiplier test (LM test) is employed to check the random effect model in comparison
to the pooling regression model. In contrast, the Hausman specification test would be used to test
the fixed-effect model versus the random effect model.
* Significance at 10% level.
** Significance at a 5% level.
***Significance at the 1% level.

4.3 Two-stage least squares regression

The proportion of tangible assets can exaggerate financial leverage, therefore, we adopt this
variable as the instrument variable to solve the endogeneity problem. There are several methods to
solve this problem. A particular variable is positively related to the random explanatory variable in
the model, but not to the arbitrary error term. Then a consistent estimator can be obtained by using
the variable and the corresponding regression coefficient in the model. This variable is called the
instrumental variable, and this estimation method is called the instrumental variable approach. In
the process of model estimation, it is used as a tool to replace the variables of random explanatory
variables related to the error term in the model, which are called instrumental variables. As an
instrumental variable, the following four conditions must be met: Highly correlated with the
random explanatory variables; It is not related to the arbitrary error term; It is not associated with
other explanatory variables in the model; When multiple instrumental variables need to be
introduced in the same model, they are not correlated with each other.
Moreover, the two stage least square, referred to as 2SLS or TSLS, is another econometric method
to solve the endogeneity problem. The instrumental variable approach is effective for structural

17
equations precisely identified. But this technique is not practical though it could give the
parameter approximation of over-recognition structural equation. The reason lies in the
arbitrariness of the selection of instrumental variables and the loss of information provided by the
unselected precursor variables. The two-stage least square method is used to analyze the
interaction of implicit variables, whereby there is no limitation on the circulation of variables.
Variables could either be customarily distributed or non-normally distributed. This benefit makes
the 2SLS method to be more critical in the implicit variable interaction analysis. Because in the
use of the current form, the original figures can be employed directly, and there is no need to
transform the original data, nor to fit the measurement of the cross product indicator variable as a
process. More practically, the 2SLS is a method that can be implemented on almost any statistical
software. And the disadvantage of 2SLS is that only one equation can be estimated at a time, and
since it is based on the theory of asymptotic free distribution, large sample size is required.
Therefore, in this part, we adopt the 2SLS method to solve the endogeneity problem and to test the
robustness of the results.

In this part, we use an instrument all variable approach in dealing with the endogeneity problem
for the financial leverage variable, which we operate is the proportion of the value of the tangible
assets to overall assets.
Table 7 informs the findings from the instrumental variable approach. According to the results, the
positive correlation between high-speeding growth companies and financial leverage is robust for
different models. The expected coefficient of the LEV variable is 0.028 in pooling regression,
0.0565 with fixed effect regression, and 0.0295 with random effect regression. All point estimates
are significant at a 1% significance level.

We also conducted the LM test and Hausman test to choose estimate methods. For the over-
speeding growth subgroup, the LM statistics are 109.36, which is significant at a 1% significance
level. So, the pooled regression method is rejected significantly. The chi2 statistics of the
Hausman test is 280.76, which is also significant at 1% significance level. So, the random effect
model is rejected significantly. Taken together the results of LM test and Hausman test, we choose
fixed effect to estimate the model.

The coefficient in fixed effect model is 0.0565 at 1% significance level, this means that the high –
speeding growth companies have 0.0565 financial leverage than those of non-speeding growth
companies. This suggests that the high-speeding growth companies have higher financial leverage
that the non-speeding growth companies. These findings are related to our prior results,
illustrating that the endogeneity can't do away away the positive correlation between high-
speeding growth to the financial leverage. Compared with the OLS regression the sign of the
financial leverage is the same, but the coefficient is smaller, which is because the instrument
variable could exclude the effect of exogenous variables. The result shows that the interpretation
ability of the exogenous variables is robust and significant.

Table 7. The 2SLS results of financial leverage on the over-speeding growth identifier
(1) (2) (3)

18
 Pooled OLS FE RE
*** ***
LEV(IV) 0.028 0.0565 0.0295***
(3.21) (3.63) (3.48)
SIZE -7.420*** -10.57* -6.413***
(-5.79) (-1.73) (-5.29)
ROA 0.665*** 0.141*** 0.560***
(3.42) (3.27) (3.25)
ROCE 0.328*** 0.393*** 0.188***
(3.44) (3.39) (3.84)
PM 0.286*** 0.614** 0.197***
(3.20) (2.51) (3.97)
LM test 109.36***
Hausman test 280.76***
Intercept 1.516*** 2.105* 1.560***
(8.78) (1.94) (7.51)
N 1231 1231 1231
r2_a 0.0745 0.1037 0.0393
This table provides the two stage least square regression(2SLS) results of financial leverage on the
over-speeding growth identifier on US high-tech companies using different models (fixed effect
model,pooling regression, and random effect model). The instrument variable is the proportion of
tangible asstes. The T-statistics are shown in the parenthesis below the coefficient figures. And
Lagrangian Multiplier test (LM test) is tasked to compare the random effect model versus the
pooling regression model. Then,the Hausman specification test is employed to compare the fixed-
effect model versus the random effect model.
* Significance at 10% level.
** Significance at 5% level.
***Significance at 1% level.

4.4 robustness test

Robustness test examines the robustness of the interpretation ability of evaluation methods and
indicators. If we change some factors, the evaluation tecniques and indicators would maintain a
relatively stable elucidation of the assessment results. In generally, it would require to alter a
defined factor and carry a repetitive tests to see if the empirical results change n accordance to the
change of factor set up. symbol and Significance change observed would indicates that it is not
strong and therefore a solution is required. We have revealed that our marks are robust in respect
to other models. In this part, we adjust the measurement of financial leverage as gearing rate and
conduct further robustness test. We choose the gearing rate to measure financial leverage, which is
denoted as variable GEA. The higher the gearing rate, the higher the financial leverage of the
company. The regression results of equation are shown in Table 9.

19
Table 8. Pairwise correlations
Variables (1) (2) (3) (4) (5) (6) (7)
(1) g 1.000
(2) HG 0.028 1.000
(3) SIZE 0.087 -0.052 1.000
(4) ROA 0.265 0.168 0.334 1.000
(5) ROCE 0.231 0.126 0.377 0.926 1.000
(6) GEA 0.098 0.026 0.302 -0.045 -0.039 1.000
(7) PM 0.241 0.118 0.336 0.204 0.721 -0.079 1.000

Before the regression analysis, we conduct the Pearson correlation test to test whether there is multi-
correlative problem for the variables. The result is shown in Table 8. As shown in Table 8, all the
correlations between variables are smaller than 0.4, this suggests that there is no autocorrelation
problem, we could estimate the regression equations in the following part. In addition, the Pearson
correlation between gearing ratio and the high-speeding growth rate company is 0.026, which is
positive and demonstrates the positive relationship exists between gearing ratio and the over-speeding
actual growth rate company. In the same time, the Pearson correlation between gearing ratio and the
actual growth rate company is 0.098, which is positive and demonstrates the positive relationship exists
between gearing ratio and the actual growth rate for US high-tech company. These two data could
confirm our two hypotheses.

To identify which empirical methodology—pooling, random effect, or fixed effect regression—is most
suitable, we perform two statistical tests: the first is the Lagrange Multiplier (LM) test (Breusch and
Pagan, 1980) of the random effect model. The null hypothesis is that the individual effect, is zero. The
chi-square statistics are reported in Row 11 of Table 9, and are equal to 161.3 with p-value of 0.000.
Thus, the null hypothesis that the individual effect is zero is rejected at the 1% significance level. The
result suggests that the cohort effect is not zero and that the pooling regression is not suitable in this
case. Second, the statistics of Hausman test is reported in Row 12 of Table 9. As shown in Table 9, the
test chi2 statistics of Hausman test is 92.7 with p-value of 0.000, which suggests that the null
hypothesis is rejected at the 1% significance level. Taken the result of LM test and Hausman test
together, the results tell us that the fixed effect model is most appropriate in estimating the regression
equation.

Table 9 provides the regression results of the financial leverage, proxied by gearing ratio, on actual
growth rate for high-tech companies. There are three different models including pooling
regression, fixed effect model and random effect model. t-statistics are provided in parenthesis
below the coefficient estimates. The results show that denote variable of the high-tech companies
with over speed growth has a positive relationship on the actual growth rate at the 1% significance
level. This positive relationship between over speed growth company denote and the actual growth
rate is robust for different empirical models. The point estimates range from 0.0226 to 0.0513,
suggesting that the actual growth rate increases about 0.0226 to 0.0513 between the gap of over
speed growth company and non - speeding growth company.

20
The impacts of other control variables on the actual growth rate have the expected signs: SIZE,
which measure the total asset of the company, has a significant negative impact on the actual
growth rate, which means that the actual growth rate will decrease when the total assets increase;
ROA which measure the return on total assets of the company, has a significant negative impact
on the actual growth rate, this suggest that the company with higher ROA will have the lower
actual growth rate; ROCE, which measure the return on capital employed of the company, has a
significant positive impact on the actual growth rate, this suggests that the high-tech company
with higher return on capital employed will have the more actual growth rate; PM, which measure
the profit margin of the company, has a significant positive impact on the actual growth rate, this
suggests that the high-tech company with higher profit margin will have the more financial
leverage.

According to the test results of LM test and Hausman test, the fixed effect model is the most
appropriate regression methodology for equation (1). The estimated coefficient of LEV in fixed effect
model is 0.698, which is significant at 1% significance level. This suggests that high-tech company
with over speed growth have higher financial leverage than those with non - speeding growth. This
result verifies the first hypothesis that financial leverage for high-tech companies with over speed
growth is greater than those with non - speeding growth.

Table 9. The regression results of gearing ratio on the high-tech company identifier
(1) (2) (3)
Pooled OLS FE RE
** **
GEA 0.0513 0.0226 0.0386*
(2.49) (2.83) (1.78)
SIZE -5.619*** -1.456** -5.548***
(-5.72) (-2.27) (-4.70)
ROA 0.702** 0.504*** 0.637***
(3.50) (3.96) (3.36)
ROCE 0.204*** 0.0232*** 0.133**
(2.93) (3.08) (2.58)
PM 0.0851 0.606** 0.106
(0.42) (2.36) (0.51)
LM test 161.3***
Hausman test 92.7***
Intercept 1.613*** 0.849 1.599***
(9.27) (0.86) (7.62)
N 1231 1231 1231
r2_a 0.0516 0.135 0.062
This table provides the regression results of gearing ratio on the high-tech company identifier on US
high-tech companies using alternative models (pooling regression, fixed effect model and random
effect model). T-statistics are provided in parenthesis below the coefficient estimates. The
Lagrangian Multiplier test (LM test) is used to test the random effect model versus the pooling
regression model. The Hausman specification test is used to test the fixed-effect model versus the

21
random effect model.
* Significant at the 10% level.
** Significant at the 5% level.
***Significant at the 1% level.

The results of Table 9 are similar to the previous ones. For both subgroups, we also conducted the
LM test and Hausman test to choose estimate methods. For the over-speeding growth subgroup, the
LM statistics are 79.9, which is significant at 1% significance level. So, the pooled regression
method is rejected significantly. The chi2 statistics of Hausman test is 48.6, which is also
significant at 1% significance level. So the random effect model is rejected significantly. Taken
together the results of LM test and Hausman test, we choose fixed effect to estimate the model.
For non-speeding growth subgroup, the LM statistics is 46.3, which is significant at 1% significance
level. So, the pooled regression method is rejected significantly. The chi2 statistics of Hausman
test is 43.32, which is also significant at 1% significance level. So, the random effect model is
rejected significantly. Taken together the results of LM test and Hausman test, we choose fixed
effect to estimate the model.

According to the result of fixed effect model, the estimated coefficient of gearing ratio (alternative
financial leverage) and the actual growth rate is 0.119 in over-speeding growth companies and the
coefficient if significant at 1% significance level. This suggests that the actual growth rate will
increase when the financial leverage increases in over - speeding growth companies. The result
verifies the second hypothesis. However, the result of fixed effect model in non-speeding growth
companies show that the estimated coefficient of gearing ratio and the actual growth rate is -0.0554,
but the coefficient is not significant. This suggests that the gearing rate has no significant relationship
with the growth increases in over - speeding growth companies. The estimation result could verify
hypothesis 3. Therefore, the results of Table 8 imply that the impact of financial leverage on the
actual growth rate for companies of high-speeding growth rate are different from the influence on
non-speeding companies. The results are in line with the results in the main body of this article.

Table 9
Over- speeding growth companies Non-speeding growth companies
Variables Pooled Pooled
FE RE FE RE
OLS OLS
GEA 0.0139*** 0.0243*** 0.0129*** -0.0750** -0.0544 -0.0260**
(3.70) (3.87) (3.64) (-2.26) (-1.05) (-2.43)
SIZE -2.910*** -22.52*** -3.123*** 0.694*** 0.379 0.682***
(-3.08) (-4.34) (-3.13) (4.16) (0.27) (4.00)
ROA 0.286*** 0.276*** 0.306*** 0.0671*** 0.107*** 0.0637***
(3.67) (3.50) (3.71) (3.83) (3.03) (3.18)
ROCE 0.00497*** 0.212*** 0.000887* 0.0498*** 0.0338*** 0.0412***
(-3.02) (3.73) (-3.00) (-3.31) (-3.65) (-3.02)
PM 0.117 0.170** 0.124 0.0269 0.0178 0.0228
(0.56) (1.53) (0.58) (0.89) (0.38) (1.09)

22
 LM test 79.9*** 43.32***
Hausman 48.6*** 46.3***
test
Intercept 0.213 -1.719*** 0.213 0.199 -0.875 0.199
(1.28) (-3.23) (1.28) (0.79) (-0.73) (0.79)
N 771 771 771 550 550 550
Adjusted 0.0132 0.229 0.028 0.129 0.488 0.027
r2
This table provides the regression results of gearing ratio on the actual growth rate of US high-tech
companies using alternative models (pooling regression, fixed effect model and random effect
model). T-statistics are provided in parenthesis below the coefficient estimates. The Lagrangian
Multiplier test (LM test) is used to test the random effect model versus the pooling regression
model. The Hausman specification test is used to test the fixed-effect model versus the random
effect model.
* Significant at the 10% level.
** Significant at the 5% level.
***Significant at the 1% level.

5.DISCUSSION AND IMPLICATIONS

The impact of financial leverage on the actual growth rate is a central issue in corporate finance. There
is a general perception that a relationship exists between economic power and the performance of the
companies. The actual growth rate is an essential aspect of financial performance. In this study, we
examine the impact of financial leverage on the substantial growth of US high-tech companies. It
shows that economic power is positively related to the financial leverage significantly and that the
positive influence on over-speeding companies is considerably stronger than for low-speeding
companies. The paper tests the robustness of these results using alternative empirical models. Also, it
employs an instrumental variable approach to deal with the endogeneity problem inherent in the
relationship between financial leverage and the actual growth rate. It shows that economic power is
positively related to the financial leverage significantly and that the positive influence on over-speeding
companies is considerably stronger than for low-speeding companies. The paper tests the robustness of
these results using alternative empirical models. Also, it employs an instrumental variable approach to
deal with the endogeneity problem inherent in the relationship between financial leverage and the
actual growth rate.

Corporate financial leverage is significantly positively correlated with profitability and development
ability. The results accord with the current small and medium-sized board market situation, our country
small and medium-sized city, the rate of assets and liabilities of the company is generally low. The
force on a type of financing, small and medium-sized listed companies show a strong equity financing
preference, and optimal sequence financing theory, suggests that small and medium-sized listed
companies are not a reasonable use of debt governance mechanisms to improve the company's
operating performance, improve the company's intrinsic value. There is no significant relationship

23
between the company's liability level and its primary business development ability and total asset
growth ability. A high asset-liability ratio, on the one hand, can reduce the company's anti-risk ability;
on the other hand, it can also provide sufficient funds for the company's business development, and at
the same time, it will inevitably lead to the increase of total assets.

There are also some implications. Paying attention to protecting the interests of small and
medium-sized investors can minimize the negative impact of minority shareholders' "voting with
their feet" on corporate performance, and make them exert influence on the behavior of corporate
decision-makers through their concerted actions, which is conducive to the improvement of
corporate performance. At present, in the securities market of mature market economy countries,
various institutional investors often play the role of significant shareholders of US high-tech
companies. For the majority of small and medium shareholders in decentralized companies,
corporate governance belongs to the category of public goods, while institutional investors often
hold a large number of shares in different companies at the same time, and they simply have no
ability or willingness to take into account the actual operating conditions of a specific company.
So they are only interested in short-term trading returns and focus on research, stock-picking, and
portfolio skills and experience. These characteristics of institutional investors inevitably lead them
to seldom participate in corporate governance. Even when they hold a large number of shares, they
will not actively monitor a company, which provides an opportunity for the "unethical" behavior
of company managers. First, promote the business innovation of commercial Banks, break through
the restriction that commercial Banks are not allowed to hold shares of companies, and will enable
them to have some stocks or convertible bonds of high-growth companies. Banks can avoid risks
by establishing firewalls between credit business and investment business, setting up independent
departments, and allocating special funds for equity investment management. Secondly, it strongly
supports the development of the equipment leasing industry. Leasing companies have the right to
acquire the ownership of the leased assets of the bankrupt lessee, instead of going into bankruptcy
liquidation. Compared with bank loans, the asset cost of a finance lease is lower than the interest
rate of the loan, so the risk of leasing assets is much less. In addition, leasing offers flexible rental
payment methods to meet the growing demand for equipment from high performance companies.
Finally, the credit guarantee system of small and medium-sized companies should be improved.
For small and medium-sized listed companies with high growth potential, there are not too many
assets for mortgage in debt financing. At present, US's credit guarantee system mainly has the
disadvantages of small scale and government intervention. The direction of reform should be to
focus on the development of financial contribution, but entrust professional guarantee companies
to operate according to market rules. This not only ensures the non-profit nature of credit
guarantee, does not increase the corporate financing burden, but also improves the guarantee
efficiency and promotes the further development of the credit guarantee system of small and
medium-sized companies.

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